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Commercial 
anking  Practice 

under  the 

Federal  Reserve  Act 


; 


Digitized  by  the  Internet  Archive 

in,  2008  with  funding  from 

Microsoft  Corporation 


http://www.archive.org/details/commercialbankinOOnatirich 


Commercial 
Banking    Practice 

under  the 

Federal  Reserve  Act 


THE  Law  and  Regulations,  the 
Informal  Rulings  of  the  Federal 
Reserve  Board,  and  the  Opinions  of 
Counsel  governing  Bank  Acceptances, 
Rediscounts,  Advances,  and  Open 
Market  Transactions  of  the  Federal 
Reserve  Banks. 


Revised  to 
October,   1918 


Service  Department 

National  Bank  of  Commerce 
in  New  York 


„     4      "C3 


AUTHORITIES 


This  book  has  been  compiled  from  the  following 
official  sources: 

Federal  Reserve  Act 

National  Bank  Act 

War  Finance  Corporation  Act 

Regulations  of  the  Federal  Reserve  Board 

Federal  Reserve  Bulletin 


First  Edition,  July,  1917 
Revised  Edition,  October,  1918 


Foreword 

Commercial  banking  has  been  made  more 
efficient  through  the  use  of  acceptances.  The 
National  Bank  of  Commerce  in  New  York  has 
been  a  pioneer  in  recommending  a  broader  use 
of  acceptances,  and  this  Bank  is  today  handling 
a  large  and  increasing  volume  of  acceptance 
business. 

We  are  engaged  in  a  commercial  banking  busi- 
ness, and,  therefore,  our  interest  in  commercial 
banking  practice  is  fundamental.  This  volume 
has  been  compiled  to  meet  the  needs  of  practical 
business  men  and  bankers — the  customers  and 
friends  of  the  National  Bank  of  Commerce  in 
New  York. 

The  present  edition  is  a  complete  revision  up 
to  October  1918  of  our  first  edition  issued  in 
July  1917.  We  have  attempted  not  only  to  revise 
but  to  improve  the  first  book. 

This  Bank  is  prepared  to  answer  questions  in 
regard  to  commercial  banking  practice  with  par- 
ticular reference  to  the  use  of  acceptances.  We 
are  constantly  in  touch  with  new  developments 
in  the  laws  and  rulings  affecting  commercial 
banking,  and  we  have  complete  information  re- 
garding the  acceptance  market. 

James  S.  Alexander. 

President 


TRADE  ACCEPTANCE 


CONTENTS 

Part  I.    Bank  Acceptances  Page 

Acceptances 9 

iXjreneral  Statutory  Provisions 11 

J  Acceptance  Policy  of  the  Federal  Reserve  Board 13 

Bank  Acceptances  Based  on  Imports  and  Exports 16 

Bank  Acceptances  Executed  to  Furnish  Dollar  Exchange ...  29 
Bank  Acceptances  Based  on  Domestic  Shipments  of  Goods   33 

Bank  Acceptances  Secured  by  Warehouse  Receipts 38 

Investment  in  Acceptances  by  Member  Banks 43 

Part  II.  Rediscounts  with  Federal  Reserve  Banks 

/General  Statutory  Provisions 49 

General  Regulations  of  Federal  Reserve  Board 53 

Rediscount  of  Promissory  Notes 56 

Rediscount  of  Drafts  and  Trade  Acceptances 76 

Rediscount  of  Six  Months'  Agricultural  Paper 90 

Rediscount  of  Commodity  Paper 96 

Rediscount  of  Bank  Acceptances 99 

Part  III.  Advances  by  Federal  Reserve  Banks 

General  Statutory  Provisions 109 

JSecurity 109 

Maturity Ill 

Part  IV.  Open  Market  Transactions 

General  Statutory  Provisions 115 

General  Regulations  and  Rulings 115 

Transactions  in  Bank  Acceptances 118 

Transactions  in  Bills  of  Exchange  and  Trade  Acceptances  .  123 
Index 128 


PART    I. 


Bank 
Acceptances 


PART  I. 


Bank  Acceptances 


The  term  "acceptance"  designates  a  draft  or  bill  '^ficnceedptance" 
of  exchange  drawn  to  order,  payable  at  a  definite 
time  after  date  or  sight,  the  obligation  to  pay  which 
has  been  accepted  by  an  acknowledgment  thereon 
written  or  stamped  and  signed  (generally  across  the 
face  of  the  instrument)  by  the  party  on  whom  the 
bill  is  drawn.  This  acknowledgment,  which  gen- 
erally consists  merely  of  the  word  "accepted"  fol- 
lowed by  signature  and  date,  constitutes  the  agree- 
ment of  the  acceptor  to  pay  the  draft  at  maturity 
according  to  its  tenor,  without  qualifying  condi- 
tions. To  be  negotiable,  such  an  accepted  bill  must 
be  for  a  definite  amount  and  must  be  payable  in 
money. 

An  ordinary  "trade  acceptance"  is  created  when,  Bank  acceptance, 
for  example,  the  seller  of  merchandise  draws  a 
draft  for  the  purchase  price  on  the  purchaser  and 
the  purchaser  accepts  the  draft.  The  purchaser, 
however,  may  enter  into  an  agreement  with  his 
bank  whereby  the  bill  is  drawn  on  the  bank  and  is 
accepted  by  it  for  his  account  instead  of  by  the  pur- 
chaser himself.  Such  a  draft,  when  accepted,  be- 
comes a  "bank  acceptance."  The  Federal  Reserve 
Board  has  defined  a  bank  acceptance  as  "a  draft  or  Definition, 
bill  of  exchange  of  which  the  acceptor  is  a  bank  or 
trust  company,  or  asfirm,  person,  company,  or  cor- 
poration engaged  in  the  business  of  granting  bank- 
ers' acceptance  credits." 

Bank  acceptances  are  used  largely  in  financing  Ute  of  bank 
international  trade  and  domestic  transactions  in-  accePtance8- 
volving  major  staple  commodities.     They  hold  a 


,  :  C  :o  m  me  rcial    Banking    Practice 

preeminent  place  among  credit  instruments  and 
offer  a  means  of  investment  in  which  the  credit  risk 
has  practically  been  eliminated.  This  is  due  to  the 
fact  that  direct  responsibility  for  their  payment 
rests  on  banking  institutions  whose  credit  is  gen- 
erally and  widely  known. 

At  a  meeting  of  the  leading  banks  and  bankers 
of  New  York,  Boston,  Philadelphia,  and  other 
cities,  held  at  the  National  Bank  of  Commerce  in 
New  York,  August  14,  1918,  it  was  resolved  that: 
"The  accepting  bank  shall  require  from  its  clients 
that  it  be  placed  in  funds  to  meet  acceptances  on 
day  of  maturity  either  by 

"(a)    The  deposit  of  clearing  house  funds  one 

day  prior  to  maturity,  or 
"(b)  The  deposit  of  cash  or  check  on  the  Federal 
Reserve  Bank  of  New  York  on  the  day  of 
maturity,  or 
"  (c)  Debit  to  the  account  of  the  bank's  client  on 
day  of  maturity  against  funds  cleared  on, 
or  prior  to,  such  date." 


11 


General  Statutory  Provisions 

Section  13  of  the  Federal  Reserve  Act,  as 
amended,  provides  as  follows  with  regard  to  the 
power  of  national  banks  as  members  of  the  Federal 
Reserve  System  to  accept  drafts  or  bills  of  ex- 
change : 

"Any  member  bank  may  accept  drafts  or  bills  of  Acceptance  of 
exchange  drawn  upon  it  having  not  more  than  six  drafts* 
months'  sight  to  run,  exclusive  of  days  of  grace, 

"I.     Which  grow  out  of  transactions  involving  Against  imports 
the  importation  or  exportation  of  goods ;  or  an    exports- 

"II.     Which  grow  out  of  transactions  involving  Against  domestic 
the  domestic  shipment  of  goods  provided  shipping  s  ipmen  s* 
documents  conveying  or  securing  title  are  attached 
at  the  time  of  acceptance ;  or 

"III.     Which  are  secured  at  the  time  of  accept-  Against  goods  in 
ance  by  a  warehouse  receipt  or  other  such  document  warehouse- 
conveying  or  securing  title  covering  readily  market- 
able staples. 

"No  member  bank  shall  accept,  whether  in  a  for-  Limit  on  acceptances 
eign  or  domestic  transaction,  for  any  one  person,  for  one  interest- 
company,  firm,  or  corporation  to  an  amount  equal 
at  any  time  in  the  aggregate  to  more  than  ten  per 
centum  of  its  paid-up  and  unimpaired  capital  stock 
and  surplus,  unless  the  bank  is  secured  either  by 
attached  documents  or  by  some  other  actual  se- 
curity growing  out  of  the  same  transaction  as  the 
acceptance ;  and 

"No  bank  shall  accept  such  bills  to  an  amount  Limit  on  aggregate 
equal  at  any  time  in  the  aggregate  to  more  than  acceptances, 
one-half   of   its    paid-up  and   unimpaired   capital 
stock  and  surplus: 

"Provided,  however,  that  the  Federal  Reserve  Extension  of  limit. 
Board,  under  such  general  regulations  as  it  may 


12 


Commercial    Banking    Practice 


Limit  on  aggregate 
domestic   acceptances. 


Acceptances  for 
dollar   exchange. 


Acceptances  for  one 
bank  limited. 


Limit  on  aggregate 
of  such  acceptances. 


prescribe,  which  shall  apply  to  all  banks  alike  re- 
gardless of  the  amount  of  capital  stock  and  surplus, 
may  authorize  any  member  bank  to  accept  such  bills 
to  an  amount  not  exceeding  at  any  time  in  the 
aggregate  one  hundred  per  centum  of  its  paid-up 
and  unimpaired  capital  stock  and  surplus : 

"Provided,  further,  that  the  aggregate  of  accept- 
ances growing  out  of  domestic  transactions  shall  in 
no  event  exceed  fifty  per  centum  of  such  capital 
stock  and  surplus. 

"IV.  Any  member  bank  may  accept  drafts  or 
bills  of  exchange  drawn  upon  it  having  not  more 
than  three  months'  sight  to  run,  exclusive  of  days 
of  grace,  drawn  under  regulations  to  be  prescribed 
by  the  Federal  Reserve  Board  by  banks  or  bankers 
in  foreign  countries  or  dependencies  or  insular  pos- 
sessions of  the  United  States  for  the  purpose  of  fur- 
nishing dollar  exchange  as  required  by  the  usages 
of  trade  in  the  respective  countries,  dependencies, 
or  insular  possessions. 

"Provided,  however,  that  no  member  bank  shall 
accept  such  drafts  or  bills  of  exchange  referred  to 
in  this  paragraph  for  any  one  bank  to  an  amount 
exceeding  in  the  aggregate  ten  per  centum  of  the 
paid-up  and  unimpaired  capital  and  surplus  of  the 
accepting  bank  unless  the  draft  or  bill  of  ex- 
change is  accompanied  by  documents  conveying  or 
securing  title  or  by  some  other  adequate  security : 

"Provided,  further,  that  no  member  bank  shall 
accept  such  drafts  or  bills  in  an  amount  exceeding 
at  any  time  the  aggregate  of  one-half  of  its  paid-up 
and  unimpaired  capital  and  surplus." 

(Federal  Reserve  Act,  Section  13.) 


13 


Acceptance  Policy  of  the  Federal 
Reserve  Board 

GENERAL    STATEMENT 


The  Federal  Reserve  Board  desires  to  avoid  the 
adoption  of  rigid  regulations  covering  acceptances. 
The  development  of  an  efficient  acceptance  system 
will  be  facilitated  if  the  banks  of  the  United  States 
assimilate  and  voluntarily  adopt  the  underlying 
principles  by  which  the  Board  must  be  guided,  with- 
out requiring  inflexible  rules. 

Conservation  of  the  strength  of  the  Federal  Re-  J^^"^ 
serve  System  requires :  serve  System. 

(a)  That  it  be  possessed  of  short  paper  well 
scattered  in  its  maturities  (not  exceeding  ninety 
days)  ; 

(b)  That  when  this  paper  matures  it  can  be  act- 
ually collected ; 

(c)  That  the  supply  of  new  paper  coming  into 
the  market  can  be  controlled  to  a  certain  degree  by 
an  advance  or  decline  in  the  rate  of  interest  at  which 
bankers'  acceptances  are  bought. 

Agreements  to  grant  credits  for  an  extended  Character  of^ 
period  by  the  purchase  of  90-day  paper  or  by  90-  accepanc< 
day  acceptances  ought  to  be  based  upon  transac- 
tions connected  directly  with  the  purchase  and  sale 
of  goods  and  the  intermediate  process  of  manufac- 
turing. Credits  so  extended  should  relate  to  the 
[liquid]  resources  of  the  borrowing  concern  and 
should  not  be  granted  for  the  purpose  of  furnishing 
working  capital  or  for  the  temporary  financing  of 
permanent  investments. 


14 


Commercial    Banking    Practice 


These  transactions  should  be  of  an  individual 
character.  They  call  for  direct  contact  between 
banker  and  borrower,  and  syndicate  credits  should 
be  avoided.  Agreements  by  bankers  to  furnish  one 
or  two  year  money  at  a  definite  rate  of  interest 
against  90-day  paper  or  acceptances  to  be  used  to 
finance  themselves  should  not  be  countenanced, 
either  openly  or  in  the  form  of  exchange  of  paper 
between  bankers. 

(Memorandum  issued  by  Federal  Reserve  Board,  Pages 
257,  260,  April,  1918,  Bulletin;  printed  in  full  at  Pages  257- 
260.) 


SYNDICATE  ACCEPTANCE   CREDITS 


Policy  of  Federal 
Reserve  Board. 


Authorization. 


Duration  of 
credits. 


Rate. 


Character. 


The  Federal  Reserve  Board  has  issued  a  mem- 
orandum stating  its  policy  in  dealing  with  accept- 
ances drawn  under  credits  extending  over  a  period 
of  one  or  two  years. 

In  this  memorandum  the  Board  authorized  the 
banks  of  New  York,  during  a  period  which  may  be 
declared  ended  at  any  time,  to  proceed  upon  certain 
principles  which  may  be  summed  up  as  follows : 

(1)  Acceptance  credits  opened  for  periods  in 
excess  of  90  days  should  only,  in  exceptional  cases, 
extend  over  a  period  of  more  than  one  year,  and 
in  no  case  for  a  time  exceeding  two  years. 

(2)  Banks  which  are  members  of  groups  open- 
ing these  credits  should  not  buy  their  own  accept- 
ances, and  where  an  agreement  is  made  with  the 
drawer  for  purchase  of  acceptances  for  future  de- 
livery, the  rate  should  not  be  a  fixed  one,  but  should 
be  based  upon  the  rate  ruling  at  the  time  of  the  sale. 

(3)  Transactions  covered  by  these  credits 
should  be  of  a  legitimate  commercial  nature,  and 
acceptances  must  be  eligible  according  to  the  rules 
and  regulations  of  the  Board. 


Bank    Acceptances 


15 


(4)  Whenever  syndicates  are  formed  for  the  Fld«ante!erve 
purpose  of  granting  acceptance  credits  for  more  Board, 
than  moderate  amounts,  Federal  reserve  banks 
should  be  consulted  with  regard  to  the  transaction. 
The  question  of  eligibility,  both  from  the  stand- 
point of  the  character  of  the  bill  and  of  the  amount 
involved,  will  be  passed  upon  by  the  Federal  re- 
serve bank  subject  to  the  approval  in  each  case  of 
the  Federal  Reserve  Board. 

It  must  be  understood  in  passing  upon  these  Quality  and 
transactions  that  not  only  quality  but  also  quantity  Jontroifin?* 
must  be  the  controlling  factors.    The  aggregate  of  factors, 
these  acceptances  should  not  be  permitted  to  con- 
stitute the  greater  proportion  of  outstanding  ac- 
ceptances at  any  time,  and  it  must  be  understood 
that  while  the  Federal  reserve  banks  and  the  Fed- 
eral Reserve  Board  might  look  with  favor  upon  a 
transaction  as  long  as  the  total  amount  involved  is 
not   excessive,   transactions    of   exactly   the   same 
character  may  be  ruled  out  whenever  the  aggregate 
amount  of  outstanding  acceptances  of  this  char- 
acter becomes,  in  the  opinion  of  the  Federal  Re- 
serve Board,  unduly  large. 

(Announcement  of  Federal  Reserve  Board,  Page  257,  April, 
1918,  Bulletin.) 


Bank  Acceptances  Based  on 
Imports  and  Exports 


CHARACTER 


Statutory  Provisions 


4 'Any  member  bank  may  accept  drafts  or  bills  of 
exchange  .  .  .  which  grow  out  of  transactions 
involving  the  importation  or  exportation  of  goods." 

(Federal  Reserve  Act,  Section  13.) 


Opinions  and  Rulings 

Determination  of  Character  of  Transactions  on  Which 
Acceptances  Are  Based. 

Held  not  to  be  necessary  that  the  specific  goods 
covered  by  an  acceptance  based  upon  an  import  or 
export  transaction  must  be  identified  at  the  time  of 
the  acceptance. 

(Informal  Ruling,  Page  405,  December,  1915,  Bulletin.) 

Good  faith  must  be  relied  upon  to  a  large  extent 
in  determining  whether  an  acceptance  is  based  upon 
a  transaction  involving  the  importation  or  exporta- 
tion of  goods.  A  member  bank  would  be  justified 
in  putting  on  the  legend  "this  acceptance  is  based 
on  a  transaction  involving  the  importation  or  ex- 
portation of  goods,"  provided  it  is  satisfied  the  state- 
ment by  its  customer  is  made  in  good  faith. 

(Informal  Ruling,  Page  406,  December,  1915,  Bulletin.) 


Bank    Acceptances 


17 


Member  banks  may  best  protect  themselves  in  Proof  of 
determining  whether  acceptances  are  based  upon 
the  exportation  or  importation  of  goods  by  stipu- 
lating the  right  at  times  to  ask  for  substantiation  of 
assurances  from  a  customer. 

(Informal  Ruling,  Page  406,  December,  1915,  Bulletin.) 

Transaction    Must     Itself    Involve     Import     or    Export 
of    Goods. 

A  transaction,  in  order  to  be  the  basis  of  a  draft  Jransac*ions 
or  bill  eligible  for  acceptance  by  a  member  bank,  impeoPrtnornexport 
must  itself  involve  the  importation  or  exportation  not  suffic»*nt  basi 
of  goods.    A  transaction  wholly  independent  of  the 
transaction  covering  the  importation  or  exportation 
of  goods  is  not  sufficient  basis  for  an  acceptance,  un- 
der the  terms  of  section  13  (relating  to  acceptances 
against  imports  or  exports). 

(Opinion  of  Counsel,  Page  276,  September,  1915,  Bulletin.) 

Where  the  contract  between  a  seller  of  goods  who  Drafl$  tre?ted 

.  •i*-ias  "rawn  in 

draws  a  draft  and  the  purchaser  is  entirely  inde-  domestic 

pendent  of  the  contract  for  the  export  of  the  goods,  transactlons- 
the  draft  would  have  to  be  treated  as  drawn  in  a 
domestic  transaction  and  would  have  to  be  accom- 
panied by  shipping  documents  or  secured  by  ware- 
house receipts  or  other  similar  documents  convey- 
ing and  securing  title  when  accepted  by  the  drawee 
bank. 

(Informal  Ruling,  Page  435,  May,  1918,  Bulletin.) 

A  dealer  having  drawn  drafts  accepted  by  a  Option  £aft$ 
member  bank  in  an  export  transaction  should  be  as  in  domestic 
given  the  option,  with  the  consent  of  the  accepting 
bank,  to  secure  such  drafts  in  the  manner  required 
of  those  drawn  in  domestic  transactions  if  he  wishes 
to  use  the  proceeds  derived  from  the  sale  of  the 
goods  exported  for  purposes  other  than  the  pay- 
ment of  such  acceptances. 

(Opinion  of  Counsel,  Page  439,  May,  1918,  Bulletin.) 


transactions. 


Commercial    Banking    Practice 


cceptance  at 
istance  of 

sporter. 


itention  to 
xport  ultimately 
ot  sufficient  basis. 


ale  to  Allied 
urchasing  Com- 
lission  involves 
xport. 


If  a  drawee  bank  accepts  at  the  instance  of  the 
purchaser  of  goods,  the  purchaser  having  a  contract 
to  export  such  goods,  the  drafts  would  grow  out  of 
a  transaction  involving  the  export  of  goods  and 
could  be  accepted  by  the  drawee  bank  under  author- 
ity of  section  13. 

(Informal  Ruling,  Page  435,  May,  1918,  Bulletin.) 

Where  a  domestic  corporation  "A"  enters  into  a 
contract  with  another  domestic  corporation  "B"  to 
furnish  material  to  be  used  by  "B"  in  the  manufac- 
ture of  products  which  "B"  is  under  contract  to  ex- 
port, the  mere  fact  that  the  material  furnished  is 
ultimately  intended  for  export  in  some  form  can 
not  be  said  to  merge  the  two  transactions  into  one. 
The  transaction  between  "A"  and  "B"  could  not  be 
said  to  involve  the  exportation  of  goods. 

(Opinion  of  Counsel,  Page  276,  September,  1915,  Bulletin.) 

A  member  bank  may  accept  drafts  drawn  for 
the  purpose  of  financing  the  sale  of  goods  to  one 
of  the  allied  purchasing  commissions,  such  goods 
to  be  delivered  aboard  ship  and  paid  for  within  a 
reasonable  time  thereafter. 

It  is  held  that  the  sale  of  goods  in  the  manner 
indicated  comes  within  the  terms  of  section  13,  au- 
thorizing a  member  bank  to  accept  drafts  "growing 
out  of  transactions  involving  the  importation  or  ex- 
portation of  goods,"  even  though  title  to  the  goods 
be  transferred  to  the  foreign  purchaser  before  the 
shipment  out  of  the  United  States  actually  begins. 
The  transaction  against  which  the  draft  is  drawn 
involves  the  direct  sale  to  a  foreign  purchaser,  and 
the  fact  that  the  sale  itself  may  be  consummated  be- 
fore the  exportation  of  the  goods  actually  com- 
mences is  immaterial,  provided  that  the  transaction 
is  bona  fide,  and  that  the  accepting  bank  has  no 
reason  to  believe  that  the  purchaser  will  divert  the 
goods  from  their  foreign  destination. 

(Informal  Ruling,  Page  878,  November,  1917,  Bulletin.) 


Bank    Acceptances  19 

Acceptance  of  Drafts  Prior  to  Purchase  or  Sale  of  Goods 
Imported  or  Exported. 

In  interpreting  the  word  "involved"  in  connec-  Goods  purchased 
tion  with  the  importation  or  exportation  of  goods,  acceptance.  ° 
upon  which  an  acceptance  has  been  based,  it  is  held 
that  goods  may  be  purchased  and  shipped  subse- 
quent to  the  time  of  the  first  acceptance,  provided 
that  there  is  a  definite  bona  fide  contract  for  the 
shipment  of  the  goods  within  a  specified  and  reason- 
able time. 

(Informal  Ruling,  Page  405,  December,  1915,  Bulletin.) 

Section  13  of  Federal  Reserve  Act  construed  to  Delay  in 
justify  a  national  bank  in  accepting  a  draft  drawn  immaterial! 
upon  it  in  settlement  of  advances  for  cotton  being 
accumulated  by  cotton  buyers  for  export.    The  fact 
that  there  is  a  temporary  delay  in  actual  shipment 
of  goods  is  immaterial. 

(Informal  Ruling,  Page  458,  September,  1916,  Bulletin.) 

A  national  bank  may  properly  accept  a  draft,  ^"£*{aj£teu8re 
drawn  for  the  purpose  of  importing  goods  whether  importations 
or  not  the  sale  of  the  goods  under  consideration  has  of  *ood*- 
actually  been  consummated  at  the  time  of  the  ac- 
ceptance of  the  draft,  if  the  accepting  bank  is  as- 
sured that  the  proceeds  of  the  draft  will  ultimately 
be  used  solely  for  the  purpose  of  financing  a  trans- 
action involving  the  importation  of  goods.    It  is  not 
necessary  that  the  goods  to  be  sold  be  identified  at 
the  time  of  acceptance.    The  accepting  bank,  how- 
ever, must  be  reasonably  sure  that  the  draft  is 
drawn  for  the  purpose  of  financing  a  transaction  in- 
volving the  importation  or  exportation  of  goods, 
and  that  its  proceeds  will  be  used  for  that  purpose. 

(Informal  Ruling,  Page  527,  July,  1917,  Bulletin.) 

A  member  bank  would  be  justified,  if  fully  se-  ^tp?utlfif£a*ract 
cured,  in  accepting  drafts  drawn  by  a  local  cotton- 
buying  firm  having  a  contract  to  sell  to  foreign  buy- 
ers if  the  transaction,  after  having  been  made  in 


Commercial    Banking    Practice 


afts  drawn 
linst  collateral 
acceptances. 


eligible  for 
ceptance. 


good  faith,  ultimately  resulted  in  the  sale  of  the 
cotton  to  an  American  instead  of  a  foreign  pur- 
chaser. It  was  assumed  in  connection  with  this  in- 
terpretation of  section  13  that  the  bank  had  received 
permission  from  the  Board  to  accept  drafts  or  bills 
of  exchange  drawn  upon  it;  that  the  cotton  buyers 
had  a  contract  to  sell  cotton  to  a  firm  of  Liverpool; 
that  they  held  the  cotton  subject  to  shipping  re- 
ceipt of  the  Liverpool  firm;  and  that  because  of 
freight  rates  and  shipping  conditions  the  Liverpool 
firm  changed  its  policy  and  directed  the  sale  of  the 
cotton. 

(Informal  Ruling,  Page  IS,  January,  1916,  Bulletin.) 

An  acceptance  house  which  has  purchased  an  ac- 
ceptance based  on  the  importation  or  exportation  of 
goods  desires  to  reimburse  itself  by  drawing  a  bill 
upon  a  national  bank,  pledging  as  collateral  secur- 
ity for  the  bill  the  original  acceptance.  It  is  held 
that  the  new  bill  cannot  properly  be  said  to  grow 
out  of  the  original  export  transaction  in  the  sense 
contemplated  by  the  Federal  Reserve  Act. 

A  national  bank  is  not  authorized  to  accept  a 
draft  drawn  under  the  above  circumstances  because 
it  is  not  an  acceptance  growing  out  of  a  transaction 
involving  the  importation  or  exportation  of 
goods,  nor  drawn  by  a  bank  or  banker  located  in  a 
foreign  country,  nor  does  it  grow  out  of  a  transac- 
tion involving  the  domestic  shipment  or  storage  of 
goods. 

(Informal  Ruling,  Page  29,  January,  1917,  Bulletin.) 


hen  acceptance 
jreements 
iould  show 
isis   of  drafts. 


Acceptance  Agreements  of  Dealers  in  Same  Goods  for 
Export  and  Domestic  Sale. 

Where  a  dealer  who  is  engaged  in  the  purchase  of 
the  same  character  and  class  of  goods  for  export 
and  for  domestic  use  desires  to  finance  the  purchase 
and  sale  of  goods  to  be  exported,  his  agreement  with 
a  member  bank  accepting  such  drafts  should  show: 


Bank    Acceptances  21 

(a)  that  he  has  a  contract  for  the  export  of  the 
goods ; 

(b)  that  the  total  amount  of  drafts  under  such 
credit  will  not  exceed  the  aggregate  amount  in- 
volved in  the  export  transaction ; 

(c)  that  the  proceeds  of  the  drafts  are  to  be 
used  in  connection  with  the  export  transaction ;  and 

(d)  that  the  proceeds  of  the  sale  of  goods  ex-  Or  drafts  should 
ported  will  be  applied  in  payment  of  the  accept-    e  secure ' 
ances  unless  the  dealer  has  in  the  meantime  placed 

the  bank  in  funds  to  meet  them  at  maturity,  or  has 
secured  such  acceptances  in  the  manner  required  of 
domestic  acceptances. 

(Opinion  of  Counsel,  Page  438,  May,  1918,  Bulletin.) 
Acceptances  against  Goin  and  Bullion. 

Gold  coin  is  "goods"  within  the  meaning  of  sec-  Gold  coin, 
tion  13  of  the  Federal  Reserve  Act. 

(Informal  Ruling,  Page  29,  January,  1917,  Bulletin.) 

Gold  bars  may  be  properly  considered  as  goods.  Bullion. 

(Informal  Ruling,  Page  29,  January,  1917,  Bulletin.) 

MATURITY 

Statutory  Provisions 

Acceptances  of  member  banks  against  imports  Maturity, 
and  exports  are  limited  to  drafts  "having  not  more 
than  six  months'  sight  to  run,  exclusive  of  days  of 
grace." 

(Federal  Reserve  Act,  Section  13.) 

Opinions  and  Killings 

Duration  of  Acceptance  Credits. 

A  national  bank  is  held  to  be  authorized  to  enter  Duration 
into  an  agreement  having  more  than  six  months  to  "0cne^ing  8IX 
run,  by  the  terms  of  which  it  obligates  itself  for  a 
period  of  time  specified  in  the  agreement  to  accept 


Commercial    Banking    Practice 


ndicate 

ceptance 

edits. 


enewals  for 
easonable   periods. 


lenewals  against 
mports  on  docks. 


drafts  drawn  upon  it,  provided  such  drafts  grow  out 
of  transactions  involving  the  importation  or  expor- 
tation of  goods,  and  that  the  individual  drafts  have 
not  more  than  six  months'  sight  to  run.  This  dis- 
tinction is  emphasized:  "While  a  letter  of  credit  or 
credit  agreement  may  lawfully  be  made  by  a  na- 
tional bank  which  will  extend  by  its  terms  for  a 
period  exceeding  six  months,  the  agreement  must 
not  be  of  such  a  character  as  will  impose  upon  the 
holders  of  drafts  accepted  thereunder  any  obliga- 
tion to  renew  such  drafts  so  that  the  period  of  ac- 
ceptance shall  exceed  six  months  in  duration  as  to 
any  specified  draft." 

(Informal  Ruling,  Page  269,  September,  1915,  Bulletin.) 

For  statement  of  policy  of  Federal  Reserve 
Board  with  regard  to  syndicate  acceptance  credits 
having  a  duration  of  several  years,  see  "Syndicate 
Acceptance  Credits,"pages  14-15,  above. 

Renewal  of  Bank  Acceptances. 

Upon  payment  of  an  acceptance  the  accepting 
bank  may  for  a  reasonable  period  accept  new 
drafts  for  the  financing  of  the  original  transaction, 
even  after  the  shipment  and  delivery  of  the  goods, 
provided  such  renewals  be  stipulated  in  the  orig- 
inal contract  as  an  incidental  condition  of  the  trans- 
action of  importation  or  exportation  upon  which  the 
acceptance  is  based. 

(Informal  Ruling,  Page  405,  December,  1915,  Bulletin.) 

The  acceptance  of  a  private  banking  house  made 
for  a  bag  company,  stating  in  the  body  of  the  draft 
that  it  is  for  burlap  from  Calcutta  stored  on  the 
docks,  might  be  continued  or  renewed  while  the 
goods  are  on  the  dock. 

(Informal  Ruling,  Page  30,  January,  1917,  Bulletin.) 


Bank    Acceptances  23 

AMOUNT  BANK  MAY  ACCEPT  FOR 
ONE  INTEREST 

Statutory  Provisions 

"No  member  bank  shall  accept,  whether  in  a  for-  Ten  per 
eign  or  domestic  transaction,  for  any  one  person,  cent  llimt 
company,  firm,  or  corporation  to  an  amount  equal 
at  any  time  in  the  aggregate  to  more  than  ten  per 
centum  of  its  paid-up  and  unimpaired  capital  stock 
and  surplus,  unless  the  bank  is  secured  either  by  Exception, 
attached  documents  or  by  some  other  actual  security 
growing  out  of  the  same  transaction  as  the  accept- 
ance." 

(Federal  Reserve  Act,  Section  13.) 

Opinions  and  Rulings 

Drafts  accepted  by  foreign  correspondents  at  the  Acceptances 
request  and  under  the  guarantee  of  a  national  bank  correspondent 
in  the  United  States  should  be  reported  as  a  direct  under  guarantee 
liability  of  such  national  bank,  and  treated  as  sub-  of  national  bark' 
ject  to  the  limitations  imposed  by  the  Federal  Re- 
serve Act  on  the   acceptance   power   of  national 
banks. 

(Opinion  of  Counsel,  Page  311,  April,  1918,  Bulletin.) 
Exemption  from  Ten  Per  Gent  Limit. 

The  ten  per  cent  limit  upon  the  amount  of  ac-  Secured 
ceptances  which  any  member  bank  might  make  for 
any  one  person,  company,  firm,  or  corporation  does 
not  apply  if  "the  bank  is  secured  either  by  attached 
documents  or  by  some  other  actual  security  grow- 
ing out  of  the  same  transaction  as  the  acceptance. 

•     •     •  y ..  : . .  .J 

If  documents  which  were  attached  at  the  time  of  Accepting 

the  acceptance  are  surrendered  and  no  other  se-  remainTecured. 
curity  growing  out  of  the  same  transaction  is  sub- 
stituted, the  ten  per  cent  limit  will  apply.    The  ac- 


Commercial    Banking    Practice 

cepting  bank  must  remain  secured  in  the  manner 
prescribed  during  the  life  of  the  acceptance  in  order 
to  be  exempt  from  the  ten  per  cent  limit. 

(Informal  Ruling,  Page  286,  April,  1917,  Bulletin.) 


rhat  constitutes 
ctual  security 
rowing  out  of 
ime  transaction. 


The  only  doubtful  question  is  as  to  what  consti- 
tutes "some  other  actual  security  growing  out  of 
the  same  transaction  as  the  acceptance."  The  ten 
per  cent  limit  does  not  apply  where  the  acceptor 
holds : 

1.  Shipping  documents. 

2.  Warehouse  receipts. 

3.  Trust  receipts  which  do  not  enable  the  bor- 

rower to  obtain  the  goods  for  his  own  use. 
The  ten  per  cent  limit  does  apply  where  the  bank 
holds  merely  the  ordinary  trust  receipt  which  gives 
it  only  a  lien  on  the  goods  in  the  hands  of  the  pur- 
chaser or  on  their  proceeds. 

(Informal  Ruling,  Page  286,  April,  1917,  Bulletin.) 


rrust  receipts 
is  actual  security. 


If  an  acceptance  is  secured  by  shipping  docu- 
ments which  are  surrendered  by  the  acceptor  for  a 
trust  receipt  which  permits  the  purchaser  of  the 
goods  to  retain  control  of  the  goods,  the  accepting 
bank  cannot  be  said  to  be  secured  "by  some  other 
actual  security"  as  provided  in  section  13  of  the 
Federal  Reserve  Act.  A  trust  receipt,  however, 
which  does  not  permit  the  purchaser  to  procure  con- 
trol of  the  goods,  may  properly  be  said  to  be  actual 
security  within  the  meaning  of  the  Act. 

(Opinion  of  Counsel,  Page  881,  November,  1917,  Bulletin.) 


When  section 
5200  applies. 


Relation  of  United  States  Revised  Statutes,  Section 
5200,  to  the  Ten  Per  Gent  Limit. 

A  member  bank  may  legally  purchase  its  own 
acceptances,  but  such  a  transaction  is  equivalent  to 
a  loan  or  advance  to  the  customer  for  whom  the  ac- 


Bank    Acceptances  25 

ceptance  was  made  and  the  liability  of  such  cus- 
tomer becomes  subject  to  the  limitations  of  section 
5200,  Revised  Statutes. 

The  limitations  imposed  by  section  5200,   Re-  ^h*|,canb°1te 
vised  Statutes,  on  the  amount  of  money  which  may 
be  borrowed  by  any  individual  from  a  member  bank 
do  not  apply  to  acceptances  of  such  bank. 

(Opinion  of  Counsel,  Page  680,  December,  1916,  Bulletin.) 

Where  a  national  bank  has  already  loaned  10  per  ^"dSn* 
cent  of  its  capital  and  surplus  to  a  certain  company,  to  loans, 
it  may,  while  the  loan  is  still  outstanding,  obligate 
itself  as  acceptor  on  a  draft  drawn  by  the  same 
company. 

If,  however,  the  member  bank  discounts  its  own  Exception, 
acceptance  under  the  foregoing  circumstances,  it 
must  treat  the  transaction  as  a  loan  and  not  as  an 
acceptance,  and  could  not  in  that  case  lend  to,  and 
accept  for,  the  same  firm  in  an  aggregate  amount  in 
excess  of  the  10  per  cent  prescribed  by  section  5200. 

(Informal  Ruling,  Page  197,  March,  1918,  Bulletin.) 

The  ten  per  cent  limitation  imposed  by  section  When  drawer 
5200  of  the  Revised  Statutes  is  not  intended  to  ap-  fun(js  to  meet 
ply  to  the  mere  acceptance  of  a  bill  of  exchange,  acceptance, 
but  the  provisions  of  section  5200  would  apply  to 
the  indebtedness  arising  between  the  drawer  of  the 
bill  and  the  accepting  bank  in  case  the  drawer  fails 
to  furnish  funds  with  which  to  meet  the  acceptance 
at  maturity. 

(Informal  Ruling,  Page  64,  February,  1916,  Bulletin;  re- 
peated from  Page  269,  September,  1915,  Bulletin.) 


Note:  The  limitations  imposed  by  the  Federal  Reserve 
Act  on  the  amount  a  bank  may  accept  for  any  one  interest 
aPply  to  drafts  "whether  in  a  foreign  or  domestic  transaction." 
The  10  per  cent  limit,  therefore,  applies  to  the  aggregate  of 
both  domestic  and  foreign  drafts  accepted  for  one  interest. 


26 


Commercial    Banking    Practice 


AGGREGATE  AMOUNT  BANK 
MAY  ACCEPT 

Statutory  Provisions 


Fifty  per 
cent  limit. 


Acceptances 

up  to  100  per  cent. 


"No  bank  shall  accept  such  bills  to  an  amount 
equal  at  any  time  in  the  aggregate  to  more  than 
one-half  of  its  paid-up  and  unimpaired  capital  stock 
and  surplus: 

"Provided,  however,  that  the  Federal  Reserve 
Board,  under  such  general  regulations  as  it  may  pre- 
scribe, which  shall  apply  to  all  banks  alike  regard- 
less of  the  amount  of  capital  stock  and  surplus,  may 
authorize  any  member  bank  to  accept  such  bills  to 
an  amount  not  exceeding  at  any  time  in  the  aggre- 
gate one  hundred  per  centum  of  its  paid-up  and 
unimpaired  capital  stock  and  surplus.     .     .     ." 

(Federal  Reserve  Act,  Section  13.) 


Application 
for  power  to 
accept  up  to 
100  per  cent. 


Report  on 
application. 


Regulations  of  Federal  Reserve  Board 

Under  the  provisions  of  the  law  .  .  .  the 
Federal  Reserve  Board  has  determined  that  any 
member  bank,  having  an  unimpaired  capital  equal 
to  at  least  twenty  per  centum  of  its  paid-up  capital, 
which  desires  to  accept  drafts  or  bills  of  exchange 
.  .  .  up  to  an  amount  not  exceeding  at  any 
time  in  the  aggregate  one  hundred  per  centum  of 
its  paid-up  and  unimpaired  capital  stock  and  sur- 
plus, may  file  an  application  for  that  purpose  with 
the  Federal  Reserve  Board.  Such  application  must 
be  forwarded  through  the  Federal  reserve  bank  of 
the  district  in  which  the  applying  bank  is  located. 

The  Federal  reserve  bank  shall  report  to  the 
Federal  Reserve  Board  upon  the  standing  of  the 
applying  bank,  stating  whether  the  business  and 
banking  conditions  prevailing  in  its  district  war- 
rant the  granting  of  such  application. 


Bank    Acceptances  27 

The  approval  of  any  such  application  may  be  Reversa| | of 
rescinded  upon  90  days'  notice  to  the  bank  af-  approva* 
fected. 

(Regulations    of    Federal    Reserve    Board,    Regulation    C, 
Series  of  1917,  A,  II.) 


Opinions  and  Rulings 


Authority  from  the  Federal  Reserve  Board  is  Permission  to 

not  necessary  for  a  member  bank  to  undertake  ac-  50  per  cent 

ceptance  business,  unless  the  bank  wishes  to  exceed  not  re<iuired- 
50  per  cent  of  its  capital  and  surplus. 

(Informal  Ruling,  Page  126,  July,  1915,  Bulletin.) 

Drafts  accepted  by  foreign  correspondents  at  AccePtance8  of 

*T  *  °  r  ,  correspondents 

the  request  and  under  the  guarantee  of  a  national  under  guarantee 
bank  in  the  United  States  should  be  reported  as  a  of  nationaI  bank* 
direct  liability  of  such  national  bank,  and  should  be 
treated  as  subject  to  the  limitations  imposed  by  the 
Federal  Reserve  Act  on  the  acceptance  power  of 
national  banks. 

(Opinion  of  Counsel,  Page  311,  April,  1918,  Bulletin.) 

When  a  member  bank  purchases  its  own  accept-  Pur<*a8e  of 
ance  before  maturity  such  acceptance  need  not  be  acceptance, 
included  in  the  aggregate  of  acceptances  author- 
ized by  section  13. 

(Opinion  of  Counsel,  Page  S97,  August,  1916,  Bulletin. 
See  also  "Purchase  by  National  Bank  of  Its  Own  Accept- 
ances," pages  45-46,  below.) 

The  limitations  imposed  by  section  5202,   Re-  Limjtoantio5r2s02of 
vised  Statutes,  on  the  liabilities  incurred  by  any 
national  bank  do  not  apply  to  acceptances  of  such 
banks. 

{Opinion  of  Counsel,  Page  680,  December,  1916,  Bulletin.) 


28  Commercial    Banking    Practice 

General  By  way  of  general  summary  it  may  be  said : 

(1)  A  member  bank  may  not  accept  bills  to  a 
greater  amount  than  50%  of  its  capital  and  sur- 
plus (unless  the  Federal  Reserve  Board  has  au- 
thorized it  to  accept  100%)  ; 

(2)  The  amount  of  domestic  bills  accepted 
shall  in  no  event  exceed  50%  of  capital  and  surplus; 

(3)  Acceptances  purchased  by  the  accepting 
bank  are  exempt  from  the  above  limitations. 


Bank  Acceptances  Executed  to 
Furnish  Dollar  Exchange 


CHARACTER 

Statutory  Provisions 

"Any  member  bank  may  accept  drafts  or  bills  of  ^Jjj" 
exchange  drawn  upon  it  having  not  more  than  three  exchange, 
months'  sight  to  run,  exclusive  of  days  of  grace, 
drawn  under  regulations  to  be  prescribed  by  the 
Federal  Reserve  Board  by  banks  or  bankers  in  for- 
eign countries  or  dependencies  or  insular  posses- 
sions of  the  United  States  for  the  purpose  of  fur- 
nishing dollar  exchange  as  required  by  the  usages  of 
trade  in  the  respective  countries,  dependencies,  or 
insular  possessions. 

(Federal  Reserve  Act,  Section  13.) 

Regulations  of  Federal  Reserve  Roard 

Any   member   bank    desiring   to    accept   drafts  Application  for 

i         i         i  ii  •        p  j_    •  permission 

drawn  by  banks  or  bankers  in  foreign  countries  or  t0  accept. 
dependencies  or  insular  possessions  of  the  United 
States  for  the  purpose  of  furnishing  dollar  ex- 
change shall  first  make  an  application  to  the  Fed- 
eral Reserve  Board  setting  forth  the  usages  of  trade 
in  the  respective  countries,  dependencies,  or  insular 
possessions  in  which  such  banks  or  bankers  are  lo- 
cated. 

If  the  Federal  Reserve  Board  should  determine  J"*^ 
that  the  usages  of  trade  in  such  countries,  depen- 
dencies, or  possessions  require  the  granting  of  the 


30 


Commercial    Banking    Practice 


acceptance  facilities  applied  for,  it  will  notify  the 
applying  bank  of  its  approval  and  will  also  publish 
in  the  Federal  Reserve  Bulletin  the  name  or  names 
of  those  countries,  dependencies,  or  possessions  in 
which  banks  or  bankers  are  authorized  to  draw  on 
member  banks  whose  applications  have  been  ap- 
proved for  the  purpose  of  furnishing  dollar  ex- 
change. 

The  Federal  Reserve  Board  reserves  the  right  to 
modify  or  on  90  days'  notice  to  revoke  its  approval 
either  as  to  any  particular  member  bank  or  as  to 
any  foreign  country  or  dependency  or  insular  pos- 
session of  the  United  States  in  which  it  has  author- 
ized banks  or  bankers  to  draw  on  member  banks  for 
the  purpose  of  furnishing  dollar  exchange. 

(Regulations  of  Federal  Reserve  Board,  Regulation  C, 
Series  of  1917,  B,  II.) 


Purpose 
of  law. 


Countries  whose 
trade  usages  do 
not  require  such 
acceptances. 


Announcements  of  Federal  Reserve  Board 

The  purpose  of  this  act  and  the  regulation  made 
pursuant  thereto  was  to  enable  the  American  banks 
to  provide  dollar  exchange  in  countries  where  the 
check  is  not  the  current  means  of  remittance  in  pay- 
ment of  foreign  debts,  but  where  the  three  months' 
bankers'  draft  is  generally  used  for  that  purpose. 

(Announcement  of  Federal  Reserve  Board,  Page  665, 
December,  1916,  Bulletin.) 

The  Board  is  informed  that  the  bankers'  custom 
of  selling  three  months'  drafts  in  preference  to 
checks  originated  in  countries  where  the  mail  con- 
nections were  irregular  and  the  foreign-exchange 
market  was  a  limited  one,  and  where  it  would  have 
been  difficult  for  the  drawing  banker  to  be  certain 
that  he  could  find  a  cover  against  the  checks  drawn 
by  him  in  time  to  forward  it  by  the  same  mail, 
whereas,  in  drawing  a  three  months'  draft,  he  would 
feel  assured  of  being  able  to  forward  remittances 
before  his  obligation  fell  due.     Such  conditions  do 


Bank    Acceptances  81 

not  exist  in  relations  between  England  and  France 
and  the  United  States. 

(Announcement  of  Federal  Reserve  Board,  Page  665, 
December,  1916,  Bulletin.) 

Reserving  the  right  to  modify  or  revoke  its  ap-  1™^£?U 
proval  on  90  days'  notice,  the  Board  has  decided  to  warrant  such 
permit   member   banks   to   accept   foreign   drafts  accePtances- 
drawn  upon  them  by  banks  or  bankers  in  the  fol- 
lowing  countries:    Porto    Rico,    Santo   Domingo, 
Costa  Rica,  Peru,  Chile,  Brazil,  Venezuela,  Argen- 
tina, and  Bolivia. 

It  is  understood  that  such  drafts  are  to  be  drawn 
for  the  purpose  of  furnishing  dollar  exchange  as 
required  by  the  usages  and  trade  in  the  respective 
countries. 

(Announcement  of  Federal  Reserve  Board,  Page  665, 
December,  1916,  Bulletin.) 

The  following  named  countries  have  been  added 
to  the  above  list:  Colombia,  Nicaragua,  Ecuador, 
Trinidad,  and  Uruguay. 

MATURITY 

Statutory  Provisions 

Member   banks    may    accept   drafts    drawn    to  Maturity  not 
furnish  dollar  exchange   "having  not  more  than  |Jr"e  m^th*. 
three  months'  sight  to  run,  exclusive  of  days  of 
grace.    ..." 

(Federal  Reserve  Act,  Section  13.) 

AMOUNT  MEMBER  BANK  MAY  ACCEPT 
FOR  ONE  INTEREST 

Statutory  Provisions 

"No  member  bank  shall  accept  such  drafts  or  Jeennt^it 
bills  of  exchange  referred  to  in  this  paragraph  for 


n 


Commercial    Banking    Practice 


any  one  bank  to  an  amount  exceeding  in  the  aggre- 
gate ten  per  centum  of  the  paid-up  and  unimpaired 
capital  and  surplus  of  the  accepting  bank  unless  the 
draft  or  bill  of  exchange  is  accompanied  by  docu- 
ments conveying  or  securing  title  or  by  some  other 
adequate  security.  .  .  ." 
(Federal  Reserve  Act,  Section  13.) 

AGGREGATE  AMOUNT  MEMBER 
BANK  MAY  ACCEPT 


Fifty   per 
:ent  limit. 


Separate  limits 
)n  the  two 
classes  of 

acceptances. 


Section  5202 
not  applicable. 


Statutory  Provisions 

"No  member  bank  shall  accept  such  drafts  or 
bills  in  an  amount  exceeding  at  any  time  the  aggre- 
gate of  one-half  of  its  paid-up  and  unimpaired  cap- 
ital and  surplus." 

(Federal  Reserve  Act,  Section  13.) 

Opinions  and  Rulings 

"The  50  per  cent  limit  imposed  upon  the  amount 
of  drafts  which  a  member  bank  may  accept  for  the 
purpose  of  furnishing  dollar  exchange  is  separate 
and  distinct  from  and  not  included  in  the  limits  im- 
posed by  section  13  upon  the  amount  of  drafts  or 
bills  of  exchange  drawn  against  the  shipment  of 
goods  or  against  warehouse  receipts  covering  readi- 
ly marketable  staples,  which  a  member  bank  may 
accept." 

Member  banks  may  therefore  accept  such  bills 
even  though  their  acceptances  for  other  purposes 
aggregate  50%   (or  100%)  of  capital  and  surplus. 

(Opinion  of  Counsel,  Page  528,  July,  1917,  Bulletin.) 

The  limitations  imposed  by  section  5202,  Re- 
vised Statutes,  on  the  liabilities  incurred  by  any 
national  bank  do  not  apply  to  acceptances  of  such 
banks. 

(Opinion  of  Counsel,  Page  680,  December,  1916,  Bulletin.) 


53 


Bank  Acceptances  Based  on  Do- 
mestic Shipments  of  Goods 

CHARACTER 

Statutory   Provisions 

"Any  member  bank  may  accept  drafts  drawn  Acceptances 
upon  it     .     .     .     which  grow  out  of  transactions  I°ade.me$,c 
involving  the  domestic  shipment  of  goods  provided 
shipping  documents  conveying  or  securing  title  are 
attached  at  the  time  of  acceptance.     .     .     ." 

(Federal  Reserve  Act,  Section  IS.) 

Opinions  and  Rnlings 

Shipping  Documents. 

Under  the  provision  of  section  13,  which  author-  Character 
izes  any  member  bank  to  accept  drafts  based  upon  of  docuInent,• 
domestic  shipments   of  goods,  provided  shipping 
documents  conveying  or  securing  title  are  attached, 
such  documents  must  be  made  out  or  indorsed  so  as 
to  convey  or  secure  title  to  the  accepting  bank. 

(Opinion  of  Counsel,  Page  198,  March,  1918,  Bulletin.) 

A  provision  of  section  13  which  authorizes  any  Documents  not 
member   bank   to   accept   drafts   based   upon   the  [^physically 
domestic   shipment   of   goods,    provided    shipping  attached, 
documents  are  "attached,"  should  not  be  construed 
so  as  to  require  that  the  documents  be  physically 
fastened  to  the  draft.    It  is  sufficient  if  the  accept- 
ing bank  has  possession  of  the  documents  at  the 
time  of  acceptance.     If  placed  in  possession  of  the 
bank's  agent  and  under  control  of  the  bank,  such 
documents   could   clearly  be   considered  as   in  its 
possession. 

(Opinion  of  Counsel,  Page  765,  October,  1917,  Bulletin.) 


Commercial    Banking    Practice 


Transaction  Need  Not  Involve  Sale  of  Goods. 

A  member  bank  may  properly  accept  a  draft 
drawn  against  the  shipment  of  goods  from  a  corpo- 
ration to  its  agent  or  branch  even  though  no  sale  of 
the  goods  is  involved  in  the  transaction. 

In  any  case,  where  a  draft  is  drawn  against  a 
shipment  of  goods  in  a  transaction  which  does  not 
involve  the  sale  of  those  goods,  the  maturity  of  the 
draft  should  approximate  the  duration  of  their 
transit.  In  such  a  case  the  law  contemplates  that 
the  acceptance  of  the  draft  should  be  for  the  pur- 
pose of  financing  the  shipment,  and  that  it  should 
not  be  the  means  of  furnishing  a  credit  for  any  other 
purpose. 

(Informal  Ruling,  Page  690,  September,  1917,  Bulletin.) 
Acceptance  Must  Arise  Out  of  Actual  Transaction. 

A  draft  drawn  by  the  purchaser  of  the  goods 
against  a  national  bank  is  not  eligible  for  accept- 
ance by  that  bank  merely  because  it  is  secured  by  a 
bill  of  lading  covering  the  goods  bought. 

The  law  contemplates  some  actual  connection  be- 
tween the  acceptance  of  the  draft  and  the  transac- 
tion involving  the  sale  and  shipment  of  the  goods — 
that  is,  it  was  evidently  intended  that  the  draft 
should  be  drawn  to  finance  that  transaction.  If  a 
seller  ships  goods  and  mails  the  bill  of  lading  to  the 
purchaser  and  on  arrival  of  the  bill  of  lading  the 
purchaser  draws  on  his  own  bank,  attaching  the  bill 
of  lading  as  security,  and  offers  it  for  acceptance, 
the  transaction  is  merely  a  straight  loan  to  the 
drawer  secured  by  a  bill  of  lading.  As  such  it  would 
not  come  within  the  spirit  of  the  provisions  of  sec- 
tion 13. 

(Opinion  of  Counsel,  Page  380,  May,  1917,  Bulletin.) 

Retention  or  Release  of  Documents  against  Acceptance. 

Question  is  whether  it  is  necessary,  where  a  do- 
mestic acceptance  is  based  upon  a  bill  of  lading,  that 
the  bank  retain  the  bill  of  lading  or  other  collateral 


warehouse 
receipts. 


Bank    Acceptances  35 

during  the  life  of  the  acceptance,  or  may  the  bank 
release  the  bill  of  lading  after  acceptance.  Also, 
whether  the  same  rule  will  apply  in  case  the  accept- 
ance is  secured  by  a  warehouse  receipt. 

Inasmuch  as  the  statute  merely  requires  the  ac- 
cepting bank  to  be  secured  in  domestic  transactions 
by  shipping  documents  or  warehouse  receipts  at  the 
time  of  acceptance,  the  bank  would  no  doubt  have 
the  right,  if  it  became  necessary  to  do  so,  to  release 
either  the  shipping  document  or  the  warehouse  re- 
ceipt, provided  the  draft  or  drafts  accepted  for  one 
person  did  not  exceed  10  per  cent  of  the  capital 
and  surplus  of  the  accepting  bank.  This  is  a  ques- 
tion, however,  which  should  be  determined  by  the 
bank  itself. 

It  is  no  doubt  necessary  in  some  instances  for  the  Release  of 
bank  to  release  the  shipping  documents  under  some 
agreement  with  its  customer  in  order  that  the  trans- 
action may  be  consummated.  There  would  seem  to 
be  much  less  reason  for  releasing  the  warehouse  re- 
ceipts, and  the  banks  might  very  properly  adopt  the 
rule  not  to  release  warehouse  receipts  other  than  in 
exceptional  cases.  In  any  event,  this  is  purely  a 
matter  of  agreement  as  between  the  bank  and  its 
customers.  The  Federal  reserve  bank  in  redis- 
counting  such  acceptances  may  reasonably  take  into 
consideration  the  question  whether  or  not  they  are 
secured  or  unsecured  at  the  time  they  are  offered 
for  rediscount. 

(Informal  Ruling,  Page  634,  July,  1918,  Bulletin.) 

MATURITY 

Statutory  Provisions 

Any  member  bank  may  accept  such  drafts  drawn  Maturity  not  to 
upon  it,  "having  not  more  than  six  months'  sight  to  exceed  six  nouthi° 
run,  exclusive  of  days  of  grace." 

(Federal  Reserve  Act,  Section  13.) 


Commercial    Banking    Practice 


edit  agreement 
r  more  than 
:  months. 


Opinions  and  Hillings 

Duration  of  Letters  of  Credit. 

While  a  letter  of  credit  or  credit  agreement  may 
be  lawfully  made  by  a  national  bank  which  will  ex- 
tend by  its  terms  for  a  period  exceeding  six  months, 
the  agreement  must  not  be  of  such  a  character  as 
will  impose  upon  the  holders  of  the  drafts  accepted 
thereunder  any  obligation  to  renew  such  drafts  so 
that  the  period  of  acceptance  shall  exceed  six 
months  in  duration  as  to  any  specified  draft. 

(Informal  Ruling,  Page  269,  September,  1915,  Bulletin.) 


ndicate    accept- 
ce  credits. 


For  statement  of  policy  of  Federal  Reserve 
Board  with  regard  to  syndicate  acceptance  credits 
having  a  duration  of  several  years,  see  "Syndicate 
Acceptance  Credits,"  pages  14-15,  above. 


AMOUNT  BANK  MAY  ACCEPT  FOR 
ONE  INTEREST 


fty  per 
nt  limit. 


See,  under  "Bank  Acceptances  Based  on  Im- 
ports and  Exports,"  pages  23-25,  above. 


cceptances  up 
100  per  cent. 


AGGREGATE  AMOUNT  BANK 
MAY  ACCEPT 

Statutory  Provisions 

"No  bank  shall  accept  such  bills  to  an  amount 
equal  at  any  time  in  the  aggregate  to  more  than 
one-half  of  its  paid-up  and  unimpaired  capital 
stock  and  surplus : 

"Provided,  however,  that  the  Federal  Reserve 
Board,  under  such  general  regulations  as  it  may 
prescribe,  which  shall  apply  to  all  banks  alike  re- 
gardless of  the  amount  of  capital  stock  and  surplus, 
may  authorize  any  member  bank  to  accept  such  bills 


Bank    Acceptances  3 

to  an  amount  not  exceeding  at  any  time  in  the  ag- 
gregate one  hundred  per  centum  of  its  paid-up  and 
unimpaired  capital  stock  and  surplus:* 

"Provided,  further,  that  the  aggregate  of  accept-  Domestic  accept- 
ances growing  out  of  domestic  transactions  shall  in  exceed  50  per  cent, 
no  event  exceed  fifty  per  centum  of  such  capital 
stock  and  surplus." 

(Federal  Reserve  Act,  Section  13.) 


Opinions  and  Rulings 


Purchase  of 
bank's  own 


When  a  member  bank  purchases  its  own  accept- 
ance before  maturity  such  acceptance  need  not  be  accept 
included  in  the  aggregate  of  acceptances  authorized 
by  section  13. 

(Opinion  of  Counsel,  Page  397,  August,  1916,  Bulletin. 
See  also  "Purchase  by  National  Bank  of  Its  Own  Accept- 
ances," pages  45-46,  below.) 

The  limitations  imposed  by  section  5202,  Re-  ^ionnot5fJp,y 
vised  Statutes,  on  the  liabilities  incurred  by  any  to  acceptances, 
national  bank  do  not  apply  to  acceptances  of  such 
banks. 

(Opinion  of  Counsel,  Page  680,  December,  1916,  Bulletin.) 


*For  regulations  governing  acceptance  of  domestic  and  for- 
eign drafts  up  to  an  aggregate  of  100  per  cent  of  bank's  capital 
and  surplus,  see  "Bank  Acceptances  Based  on  Imports  and 
Exports,"  pages  26-28,  above. 


Bank  Acceptances  Secured  by 
Warehouse  Receipts 

CHARACTER 
Statutory  Provisions 

"Any  member  bank  may  accept  drafts  or  bills  of 
exchange  drawn  upon  it  .  .  .  which  are  se- 
cured at  the  time  of  acceptance  by  a  warehouse  re- 
ceipt or  other  such  document  conveying  or  secur- 
ing title  covering  readily  marketable  staples." 

(Federal  Reserve  Act,  Section  13.) 


Warehouse  receipts 
uist  be  issued  by 

ndependent 
warehouses. 


Opinions  and  Rulings 

Eligible   Security. 

Warehouse  receipts  offered  as  security  for  bills 
accepted  by  member  banks  must  be  issued  by  ware- 
houses which  are  independent  of  the  borrower. 

Where  a  corporation  is  formed  as  a  subterfuge 
for  the  purpose  of  evading  the  spirit  of  the  Board's 
ruling,  this  fact  should  be  taken  into  consideration 
by  a  member  bank  accepting  the  bill  and  by  the 
Federal  reserve  bank  to  which  it  is  offered  for  dis- 
count. 

If  the  borrower  exercises  such  control  over  the 
corporation  issuing  the  warehouse  receipt  as  to  give 
him  control  over  the  goods  in  storage,  the  purpose 
of  requiring  a  receipt  of  the  independent  ware- 
houseman would  be  defeated.  The  corporation  is- 
suing such  receipt  must  be  organized  in  good  faith 
as  an  independent  corporation  and  its  affairs  must 


Bank    Acceptances  39 

be  administered  by  duly  authorized  officers  and 
agents  independent  of  the  borrower. 

(Informal  Ruling,  Page  31,  January,  1918,  Bulletin;  see 
also  Informal  Ruling,  Page  30,  January,  1917,  Bulletin.) 

The  requirements  of  the  Board  appear  to  have  J*elation  h*tyf*en 

j  A     ,  ±r  borrower  and  ware- 

been  met  where  a  separate  corporation  has  been  house  corporation. 

created  and  the  warehouse  receipts  are  issued  by 
that  corporation  and  not  by  the  borrower.  How- 
ever, where  both  corporations  have  practically  the 
same  officers,  the  manager  of  the  warehouse  ap- 
pointed to  execute  the  receipts  should  not  be  an 
employee  of  the  borrowing  company,  as  the  Board 
requires  that  the  receipts  should  be  issued  by  a 
company  independent  of  the  borrower,  and  this  re- 
quirement should  be  met  in  substance  as  well  as  in 
form. 

(Informal  Ruling,  Page  862,  September,  1918,  Bulletin.) 

A  borrowing  corporation  takes  receipts  for  goods 
and  materials  stored  in  a  warehouse  controlled  by  a 
separate  corporation  engaged  solely  in  the  ware- 
house business,  the  entire  stock  of  which  is  owned 
by  the  prospective  borrower. 

If  a  representative  of  the  accepting  bank  is  given  £°"^u$°ef  b 
control  of  the  warehouse  under  a  proper  resolution  acceptors' 
of  the  directors  of  the  warehouse  corporation,  the  representative, 
fact  that  the  stock  of  the  corporation  is  owned  by 
the  borrower  should  not  prevent  the  acceptance  of 
drafts  secured  by  the  warehouse  receipts. 

It  should  be  agreed,  however,  that  if  by  any  fu- 
ture action  of  the  warehouse  corporation  an  attempt 
is  made  to  exercise  control  over  the  warehouse,  the 
representative  of  the  acceptor  should  have  the  right 
to  move  the  goods  and  to  place  them  in  storage  else- 
where at  the  expense  of  the  warehouse  corporation. 

(Informal  Ruling,  Page  862,  September,  1918,  Bulletin.) 

A  canned  goods  concern  proposes  to  place  part  ^^X^hisee^ 
of  its  readily  marketable  goods  and  materials  in 


40 


Commercial    Banking    Practice 


storage  with  a  lessee  of  part  of  its  premises.  The 
lessee  is  then  to  issue  warehouse  receipts  to  the 
owner  of  the  goods,  which  receipts  are  to  be  used  as 
security  for  drafts  drawn  against  and  accepted  by 
a  member  bank. 

If  the  premises  in  question  are  actually  turned 
over  to  the  lessee  under  a  bona  fide  lease,  the  lessee 
being  independent  of  the  borrower  and  having  en- 
tire custody  and  control  of  the  goods,  there  would 
seem  to  be  no  objection  to  a  member  bank  accept- 
ing drafts  against  the  security  of  warehouse  receipts 
issued  by  such  lessee.  It  should,  however,  be  ex- 
pressly understood  and  agreed  that  the  borrower 
shall  not  have  access  to  the  premises  except  with  the 
permission  of  the  lessee  and  that  he  shall  exercise  no 
control  of  any  sort  over  the  goods  against  which 
warehouse  receipts  are  issued.  The  warehouse  re- 
ceipts must,  of  course,  be  in  form  to  properly  con- 
vey and  secure  title  to  the  bank. 

(Informal  Ruling,  Page  634,  July,  1918,  Bulletin.) 


Receipt  of  cus- 
todian of  wool  as 
warehouse    receipt. 


It  being  understood  that  wool  is  stored  in  build- 
ings under  control  of  custodian  entirely  indepen- 
dent of  borrower,  custodian's  certificate  or  receipt, 
if  issued  in  proper  form  to  convey  or  secure  title, 
may  be  treated  as  a  warehouse  receipt  within  the 
meaning  of  section  13  of  the  Federal  Reserve  Act 
and  acceptance  of  member  bank  under  such  condi- 
tions would  be  eligible  for  rediscount. 

(Informal  Ruling,  Page  636,  July,  1918,  Bulletin.) 


Acceptance  of 
drafts  against 
sugar  in  bond. 


It  is  the  understanding  of  this  office  that  sugar 
referred  to  is  placed  in  bond  under  transit  entry 
and  warehouse  receipt  issued  by  collector  in  nego- 
tiable form,  but  sugar  can  not  be  withdrawn  for 
domestic  sale  or  consumption  without  special  per- 
mission of  Treasury  Department.  Board  is  of 
opinion  that  member   banks   may   legally   accept 


Bank    Acceptances  41 

drafts  drawn  against  security  of  such  warehouse  re- 
ceipt properly  assigned. 

(Informal  Ruling,  Page  520,  June,  1918,  Bulletin.) 
Ineligible  Security. 

Drafts  or  bills  of  exchange  drawn  in  domestic  Chattel 
transactions  against  a  national  bank  cannot,  under  ""^w*1- 
authority  of  section  13,  be  accepted  when  secured 
by  a  chattel  mortgage  on  cattle  but  only  when  ac- 
companied by  shipping  documents  or  when  secured 
by  a  warehouse  receipt  or  other  similar  document 
conveying  or  securing  title  to  readily  marketable 
staples. 

While  cattle  may  be  treated  as  readily  marketable 
staples,  a  chattel  mortgage  is  not  considered  a  docu- 
ment similar  to  a  warehouse  receipt  since  the  bor- 
rower retains  the  possession  of  the  goods  and  con- 
veys to  the  bank  only  the  legal  title. 

(Informal  Ruling,  Page  309,  April,  1918,  Bulletin.) 

A  national  bank  is  not  authorized  to  accept  a  Collateral 
draft  secured  by  collateral  notes  which  are  in  turn  Jotecshastet^r*d 
secured  by  chattel  mortgages  on  cattle.  mortgages. 

(Informal  Ruling,  Page  690,  September,  1917,  Bulletin.) 

Member  banks  are  not  authorized  to  accept  drafts 
of  a  cattle-loan  company  secured  by  notes  of  the 
owner  of  the  cattle,  although  such  notes  may  be  se- 
cured by  a  chattel  mortgage  executed  by  the  owner 
of  the  cattle  to  the  cattle-loan  company  and  the 
notes  and  chattel  mortgage  accompany  the  draft  at 
the  time  of  acceptance. 

(Opinion  of  Counsel,  Page  871,  September,  1918,  Bulletin.) 

A  bill  of  sale  is  not  a  receipt  similar  to  a  ware-  Bills  of  sale, 
house  or  terminal  receipt ;  it  is  merely  in  substance 
a  chattel  mortgage  to  goods  in  the  hands  of  the 
drawer  and  not  a  receipt  for  goods  sold  in  the  hands 
of  some  third  party  "independent  of  the  borrower." 

(Opinion  of  Counsel,  Page  684,  December,  1916,  Bulletin.) 


Commercial    Banking    Practice 

The  acceptance  of  a  draft  by  a  member  bank 
against  an  acceptance  agreement  which  purports  to 
assign  to  the  bank  certain  collateral  security,  but 
which  does  not  specifically  mention  any  security  as 
assigned,  is  an  ordinary  accommodation  acceptance, 
and  is  not  authorized  by  law. 

(Opinion  of  Counsel,  Page  311,  April,  1918,  Bulletin.) 


Substitution. 


Substitution  of  Warehouse  Receipts. 

It  is  held  that  there  is  no  objection  to  permitting 
mills  to  substitute  other  warehouse  receipts  for  cot- 
ton receipts  during  the  life  of  an  acceptance. 

(Informal  Ruling,  Page  30,  January,  1917,  Bulletin.) 
For  a  ruling  governing  the  release  of  warehouse  receipts 
after  acceptance,  see  page  35,  above. 


MATURITY 

See,  under  "Bank  Acceptances  Based  on  Domes- 
tic Shipments  of  Goods,"  pages  35-36,  above. 

AMOUNT  BANK  MAY  ACCEPT  FOR 
ONE  INTEREST 

See,  under  "Bank  Acceptances  Based  on  Im- 
ports and  Exports,"  pages  23-25,  above. 


AGGREGATE    AMOUNT  BANK 
MAY  ACCEPT 

See,  under  "Bank  Acceptances  Based  on  Domes- 
tic Shipments  of  Goods,"  pages  36-37,  above. 


43 


Investment  in  Acceptances  by 
Member  Banks 

Statutory  Provisions 

"The  total  liabilities  to  any  association,  of  any  Ten  per  cent  limit 
person,  or  of  any  company,  corporation,  or  firm  for  ™l,£,°[)7 
money  borrowed,  including  in  the  liabilities  of  a  national  bank, 
company  or  firm  the  liabilities  of  the  several  mem- 
bers thereof,  shall  at  no  time  exceed  ten  per  centum 
of  the  amount  of  the  capital  stock  of  such  associa- 
tion, actually  paid  in  and  unimpaired,  and  ten  per 
centum  of  its  unimpaired  surplus  fund:   Provided, 
however,  that  (1)  the  discount  of  bills  of  exchange  Exception  of 
drawn  in  good  faith  against  actually  existing  val-  djSC0UDt  °f  bilI» 
ues,    (2)    the  discount  of  commercial  or  business  LsSew* paper! 
paper  actually  owned  by  the  person,  company,  cor- 
poration, or  firm,  negotiating  the  same,  and  (3)  the 
purchase  or  discount  of  any  note  or  notes  secured  Paper  secured 
by  not  less  than  a  like  face  amount  of  bonds  of  the  obiigatbl.8*"*" 
United  States  issued  since  April  24,  1917,  or  cer- 
tificates of  indebtedness  of  the  United  States,  shall 
not  be  considered  as  money  borrowed  within  the 
meaning  of  this  section;  but  the  total  liabilities  to 
any  association,  of  any  person,  or  of  any  company, 
corporation,  or  firm,  upon  any  note  or  notes  pur- 
chased or  discounted  by  such  association  and  secured 
by  such  bonds  or  certificates  of  indebtedness,  shall 
not  exceed  (except  to  the  extent  permitted  by  rules 
and  regulations  prescribed  by  the  Comptroller  of 
the  Currency,  with  the  approval  of  the  Secretary  of 
the  Treasury)  ten  per  centum  of  such  capital  stock 
and  surplus  fund  of  such  association." 

(U.  S.  Revised  Statutes,  Section  5200,  as  amended  Septem- 
ber 24,  1918.) 


44 


Commercial    Banking    Practice 


"Bills  of 

exchange"  include 
bank  acceptances. 


Bills  discounted 
before   acceptance. 


Secured    by    shipping 
documents  or 
pledge  of  goods. 


Bills  discounted 
after    acceptance. 


Acceptance 
discounted  after 
removal  of 
attached 
documents. 


Opinions  and  Rulings 

Purchase  or  Discount  of  Acceptances    of    Other   Banks. 

"Bills  of  exchange"  may  be  taken  as  including 
acceptances,  since  a  bill  does  not  lose  its  character- 
istics as  such  when  accepted  by  the  drawee. 

(Opinion  of  Counsel,  Page  195,  March,  1917,  Bulletin.) 

A  bill  of  exchange  discounted  before  acceptance 
may  be  said  to  be  drawn  against  actually  existing 
value  .  .  .  only  when  it  is  accompanied  by 
shipping  documents,  warehouse  receipts,  or  other 
papers  securing  title  to  the  goods  sold. 

(Opinion  of  Counsel,  Page  195,  March,  1917,  Bulletin.) 

A  bill  secured  by  shipping  documents,  or  by  the 
pledge  of  goods  actually  sold,  might  be  discounted 
by  a  member  bank  before  acceptance  without  being 
subject  to  the  limitations  imposed  by  section  5200, 
since  this  would  constitute  a  bill  drawn  in  good 
faith  against  actually  existing  value. 

(Opinion  of  Counsel,  Page  683,  December,  1916,  Bulletin.) 

If  the  bill  is  discounted  after  acceptance  it  may 
be  treated  as  drawn  against  existing  values  if  drawn 
against  the  drawee  at  the  time  of,  or  within  a  rea- 
sonable time  after,  the  shipment  or  delivery  of  the 
goods  sold.  There  must  be  reasonable  grounds  to 
believe  at  the  time  the  bill  is  drawn  that  the  goods 
are  in  existence  in  the  hands  of  the  drawee  either 
in  their  original  form  or  in  the  shape  of  the  proceeds 
of  their  sale. 

(Opinion  of  Counsel,  Page  195,  March,  1917,  Bulletin.) 

When  such  bill  has  been  accepted  by  the  drawee 
and  the  documents  attached  have  been  removed, 
though  the  direct  obligation  of  the  drawee  to  pay 
such  bill  at  maturity  may  be  said  to  be  substituted 
for  the  "actual  value"  against  which  the  bill  was 


Bank    Acceptances  45 

originally  drawn,  nevertheless,  when  discounted  by 
a  bona  fide  owner  for  value,  its  discount  would  not 
be  subject  to  the  limitations  of  section  5200,  since 
it  would  still  come  within  the  classification  of  "com- 
mercial or  business  paper  actually  owned  by  the 
person  negotiating  the  same." 

Should  the  drawee  who  accepts  the  bill,  however, 
attempt  to  discount  it  with  a  member  bank  it  would 
be  subject  to  the  limitations  of  section  5200,  since 
in  that  case  the  party  primarily  liable  would  in  ef- 
fect borrow  money  from  the  bank  on  his  own  ob- 
tigation. 

(Opinion  of  Counsel,  Page  683,  December,  1916,  Bulletin.) 

The  Board  finds  it  necessary  to  adhere  to  its  es-  Disconn*  °f 
tablished  policy  of  not  making  any  general  ruling  busfnew""^". 
on  the  question  of  how  much  a  bank  may  invest  in 
any  particular  security.  It  held,  however,  that  if 
a  firm  is  a  bona  fide  owner  for  value  of  the  accept- 
ances of  any  particular  institution  and  such  accept- 
ances are  sold  to  or  discounted  with  a  member  bank, 
the  acceptances  could  no  doubt  be  treated  as  com- 
mercial or  business  paper  actually  owned  by  the 
party  negotiating  them  and  would  therefore  be  ex- 
cepted from  the  limitations  of  section  5200,  Re- 
vised Statutes.  Ruling  rests  upon  the  fact  that 
paper  is  commercial  or  business  paper  actually 
owned  by  the  person  negotiating  it. 

(Informal  Ruling,  Page  678,  December,  1916,  Bulletin.) 


Purchase  by  National  Bank  of  Its   Own  Acceptances. 

A  member  bank  may  legally  purchase  its  own  ac-  Bank  may 

purchase  il 

own  acceptances. 


ceptances,  but  such  a  transaction  is  equivalent  to  a  p 
loan  or  advance  to  the  customer  for  whom  the  ac- 
ceptance was  made  and  the  liability  of  such  cus- 
tomer becomes  subject  to  the  limitations  of  section 
5200,  Revised  Statutes. 

(Opinion  of  Counsel,  Page  680,  December,  1916,  Bulletin.) 


46 


Commercial    Banking    Practice 


Exemption  from 
limitations  of 
Section  13. 


Reissuance  of 
acceptances. 


Rediscount    of 
such    acceptances. 


When  a  bank  purchases  its  own  acceptance  be- 
fore maturity  such  acceptance  need  not  be  included 
in  the  aggregate  of  acceptances  authorized  by  sec- 
tion 13. 

(Opinion  of  Counsel,  Page  397,  August,  1916,  Bulletin.) 

While  the  Board  has  ruled  that  when  a  bank  buys 
its  own  acceptances  they  are  to  be  recorded  as  loans 
subject  to  the  limitations  of  section  5200,  the  right 
of  the  bank  to  resell  or  reissue  the  acceptance  is,  in 
the  opinion  of  counsel,  fully  recognized  by  the  au- 
thorities, and  where  this  is  done  they  may  be  treated 
as  acceptances  outstanding  and  not  as  loans. 

(Informal  Ruling,  Page  691,  September,  1917,  Bulletin.) 

An  acceptance  which  has  been  purchased  by  the 
accepting  bank  and  subsequently  rediscounted  with 
its  Federal  Reserve  Bank  is  not  subject  to  the  lim- 
itations of  section  5200  of  the  Revised  Statutes. 

(Opinion  of  Counsel,  Page  696,  September,  1917,  Bulletin.) 


PART    II. 


Rediscounts 

with 

Federal   Reserve 
Banks 


49 


PART    II. 


Rediscounts    with  Federal 
Reserve  Banks 

General  Statutory  Provisions 


Member  banks  of  the  Federal  Reserve  System 
are  authorized  to  rediscount  notes,  drafts,  bills  of 
exchange,  and  bank  acceptances  with  Federal  re- 
serve banks  under  the  following  provisions  of  the 
Federal  Reserve  Act: 

"Upon  the  indorsement  of  any  of  its  member  Notes,  drafts,  and 
banks,  which  shall  be  deemed  a  waiver  of  demand,  bills  of  exchan*e- 
notice,  and  protest  by  such  bank  as  to  its  own  in- 
dorsement exclusively,  any  Federal  reserve  bank 
may  discount  notes,  drafts,  and  bills  of  exchange 
arising  out  of  actual  commercial  transactions ;  that  Commercial  paper. 
is,  notes,  drafts,  and  bills  of  exchange  issued  or 
drawn  for  agricultural,  industrial,  or  commercial 
purposes,  or  the  proceeds  of  which  have  been  used, 
or  are  to  be  used,  for  such  purposes,  the  Federal 
Reserve  Board  to  have  the  right  to  determine  or 
define  the  character  of  the  paper  thus  eligible  for 
discount,  within  the  meaning  of  this  Act.    Nothing  Agricultural  and 
in  this  Act  contained  shall  be  construed  to  prohibit  commoditJr  PaPer- 
such  notes,  drafts,  and  bills  of  exchange,  secured  by 
staple  agricultural  products,  or  other  goods,  wares, 
or  merchandise,  from  being  eligible  for  such  dis- 
count; but  such  definition  shall  not  include  notes, 


50 


Commercial    Banking    Practice 


Ineligible  paper. 


Maturity  of 
eligible  paper. 


Amount  rediscount- 
able    by    one    bank 
bearing   signature 
of  any  one  interest. 


Bank   acceptances 
eligible  for 
rediscount. 


Rediscounts    for 
member  State  banks. 


drafts,  or  bills  covering  merely  investments  or  is- 
sued or  drawn  for  the  purpose  of  carrying  or  trad- 
ing in  stocks,  bonds,  or  other  investment  securities, 
except  bonds  and  notes  of  the  Government  of  the 
United  States.  Notes,  drafts,  and  bills  admitted 
to  discount  under  the  terms  of  this  paragraph  must 
have  a  maturity  at  the  time  of  discount  of  not  more 
than  ninety  days,  exclusive  of  days  of  grace:  Pro- 
vided, that  notes,  drafts,  and  bills  drawn  or  issued 
for  agricultural  purposes  or  based  on  live  stock 
and  having  a  maturity  not  exceeding  six  months, 
exclusive  of  days  of  grace,  may  be  discounted  in  an 
amount  to  be  limited  to  a  percentage  of  the  assets 
of  the  Federal  reserve  bank,  to  be  ascertained  and 
fixed  by  the  Federal  Reserve  Board. 

"The  aggregate  of  such  notes,  drafts,  and  bills 
bearing  the  signature  or  indorsement  of  any  one 
borrower,  whether  a  person,  company,  firm,  or  cor- 
poration, rediscounted  for  any  one  bank,  shall  at  no 
time  exceed  ten  per  centum  of  the  unimpaired  capi- 
tal and  surplus  of  said  bank;  but  this  restriction 
shall  not  apjoly  to  the  discount  of  bills  of  exchange 
drawn  in  good  faith  against  actually  existing 
values. 

"Any  Federal  reserve  bank  may  discount  ac- 
ceptances of  the  kinds  hereinafter  described,  which 
have  a  maturity  at  the  time  of  discount  of  not  more 
than  three  months'  sight,  exclusive  of  days  of  grace, 
and  which  are  indorsed  by  at  least  one  member 
bank."* 

(Federal  Reserve  Act,  Section  13.) 

"No  Federal  reserve  bank  shall  be  permitted  to 
discount  for  any  [member]  State  bank  or  trust 
company  notes,  drafts,  or  bills  of  exchange  of  any 


*  For  kinds  of  acceptances  eligible  for  rediscount  under  this 
section,   see   Part   I,   "General   Statutory   Provisions/'    pages 


11-12,  above. 


Rediscounts  51 

one  borrower  who  is  liable  for  borrowed  money  to 
such  State  bank  or  trust  company  in  an  amount 
greater  than  ten  per  centum  of  the  capital  and  sur- 
plus of  such  State  bank  or  trust  company,  but  the 
discount  of  bills  of  exchange  drawn  against  act- 
ually existing  value  and  the  discount  of  commer- 
cial or  business  paper  actually  owned  by  the  person 
negotiating  the  same  shall  not  be  considered  as  bor- 
rowed money  within  the  meaning  of  this  section. 
The  Federal  reserve  bank,  as  a  condition  of  the  Condition*, 
discount  of  notes,  drafts,  and  bills  of  exchange  for 
such  State  bank  or  trust  company,  shall  require  a 
certificate  or  guaranty  to  the  effect  that  the  bor- 
rower is  not  liable  to  such  bank  in  excess  of  the 
amount  provided  by  this  section,  and  will  not  be 
permitted  to  become  liable  in  excess  of  this  amount 
while  such  notes,  drafts,  or  bills  of  exchange  are 
under  discount  with  the  Federal  reserve  bank." 
(Federal  Reserve  Act,  Section  9.) 

"No  member  bank  shall  act  as  the  medium  or  fp";™Jmfc^0"l• 
agent  of  a  nonmember  bank  in  applying  for  or 
receiving  discounts  from  a  Federal  reserve  bank 
under  the  provisions  of  this  Act,  except  by  permis- 
sion of  the  Federal  Reserve  Board." 

(Federal  Reserve  Act,  Section  19.) 

"The  discount  and  rediscount  and  the  purchase  Subiec,1  to  regulation. 

-  r  1  #11       of  Federal  Reserve 

and  sale  by  any  Federal  reserve  bank  oi  any  bills  Board, 
receivable  and  of  domestic  and  foreign  bills  of  ex- 
change, and  of  acceptances  authorized  by  this  Act, 
shall  be  subject  to  such  restrictions,  limitations,  and 
regulations  as  may  be  imposed  by  the  Federal 
Reserve  Board." 

(Federal  Reserve  Act,  Section  13.) 

"The  Federal  reserve  banks  shall  be  authorized,  Security  ^Wtr^ 
subject  to  the  maturity  limitations  of  the  Federal  bonds. 
Reserve  Act  and  to  regulations  of  the  Federal 
Reserve  Board,  to  discount  the  direct  obligations 


52 


Commercial    Banking    Practice 

of  member  banks  secured  by  .  .  .  bonds  of  the 
[War  Finance]  Corporation  and  to  rediscount  eli- 
gible paper  secured  by  such  bonds  and  indorsed  by 
a  member  bank." 

(War  Finance  Corporation  Act,  Section  13.) 


58 


General  Regulations  of  Federal 
Reserve  Board 


SUMMARY  OF  STATUTORY 
PROVISIONS 


Any  Federal  reserve  bank  may  discount  for  any 
of  its  member  banks  any  note,  draft,  or  bill  of  ex- 
change provided: 

(a)  It  has  a  maturity  at  the  time  of  discount  of  Maturity, 
lot  more  than  90  days,  exclusive  of  days  of  grace; 

out  if  drawn  or  issued  for  agricultural  purposes  or 
based  on  live  stock,  it  may  have  a  maturity  at  the 
time  of  discount  of  not  more  than  six  months,  ex- 
clusive of  days  of  grace ; 

(b)  It  arose  out  of  actual  commercial  transac-  Commercial 
tions ;  that  is,  it  must  be  a  note,  draft,  or  bill  of  ex- 
change which  has  been  issued  or  drawn  for  agri- 
cultural, industrial,  or  commercial  purposes,  or  the 
proceeds  of  which  have  been  used  or  are  to  be  used 

for  such  purposes; 

(c)  It  was  not  issued  for  carrying  or  trading  in  Finance  paper 
stocks,  bonds,  or  other  investment  securities,  ex-  ine,gI  e* 
cept  bonds  and  notes  of  the  Government  of  the 
United  States; 

(d)  The  aggregate  of  notes,  drafts,  and  bills  Ten  per  cent  limit, 
bearing  the  signature  or  indorsement  of  any  one 
borrower,  whether  a  person,  company,  firm,  or  cor- 
poration, rediscounted  for  any  one  member  bank, 

shall  at  no  time  exceed  ten  per  cent  of  the  unim- 
paired capital  and  surplus  of  such  bank;  but  this 
restriction  shall  not  apply  to  the  discount  of  bills  of 


54 


Commercial    Banking    Practice 


Indorsement. 


exchange  drawn  in  good  faith  against  actually  ex- 
isting values ; 

(e)  It  is  indorsed  by  a  member  bank; 

(f)  It  conforms  to  all  applicable  provisions  of 
this  regulation. 

(Regulations    of    Federal    Reserve    Board,    Regulation    A, 
Series  of  1917,  A,  I.) 


ELIGIBILITY  OF  NOTES,  DRAFTS, 
AND  BILLS  OF  EXCHANGE 


Commercial   paper. 


Finance  paper 
ineligible. 


Collateral 

security. 


The  Federal  Reserve  Board,  exercising  its  statu- 
tory right  to  define  the  character  of  a  note,  draft,  or 
bill  of  exchange  eligible  for  rediscount  at  a  Federal 
reserve  bank,  has  determined  that : 

(a)  It  must  be  a  note,  draft,  or  bill  of  exchange 
the  proceeds  of  which  have  been  used  or  are  to  be 
used  in  producing,  purchasing,  carrying,  or  market- 
ing goods*  in  one  or  more  of  the  steps  of  the  pro- 
cess of  production,  manufacture,  or  distribution; 

(b)  It  must  not  be  a  note,  draft,  or  bill  of  ex- 
change the  proceeds  of  which  have  been  used  or  are 
to  be  used  for  permanent  or  fixed  investments  of 
any  kind,  such  as  land,  buildings,  or  machinery; 

(c)  It  must  not  be  a  note,  draft,  or  bill  of  ex- 
change the  proceeds  of  which  have  been  used  or  are 
to  be  used  for  investments  of  a  purely  speculative 
character ; 

(d)  It  may  be  secured  by  the  pledge  of  goods  or 
collateral,  provided  it  is  otherwise  eligible. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1917,  A,  II.) 


*When  used  in  this  regulation  the  word  "goods"  shall  be 
construed  to  include  goods,  wares,  merchandise,  or  agricultural 
products,  including  live  stock. 


Rediscounts  55 

APPLICATIONS  FOR  REDISCOUNT 

All   applications    for   the   rediscount    of  notes,  Certificate  of 


drafts,  or  bills  of  exchange  must  contain  a  certifi- 
cate of  the  member  bank,  in  form  to  be  prescribed 
by  the  Federal  reserve  bank,  that,  to  the  best  of  its 
knowledge  and  belief,  such  notes,  drafts,  or  bills  of 
exchange  have  been  issued  for  one  or  more  of  the 
purposes  mentioned  in  (a),  above. 

(Regulations    of    Federal    Reserve    Board,    Regulation    A, 
Series  of  1917,  A,  III.) 


member   bank. 


Rediscount  of  Promissory 
Notes 

DEFINITION  OF  NOTE 

A  promissory  note,  within  the  meaning  of  this 
regulation,  is  defined  as  an  unconditional  promise, 
in  writing,  signed  by  the  maker,  to  pay,  in  the 
United  States,  at  a  fixed  or  determinable  future 
time,  a  sum  certain  in  dollars  to  order  or  to  bearer. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1917,  A,  IV.) 

ELIGIBLE   CLASSES  OF  NOTES 

Statutory  Provisions 


Commercial    paper. 


Agricultural  and 
commodity  paper. 


Paper  based  on 
United  States 
obligations. 


Eligible  notes  are  defined  in  the  laws  as  fol- 
lows: 

"Notes,  drafts,  and  bills  of  exchange  issued  or 
drawn  for  agricultural,  industrial,  or  commercial 
purposes,  or  the  proceeds  of  which  have  been  used, 
or  are  to  be  used,  for  such  purposes,  the  Federal 
Reserve  Board  to  have  the  right  to  determine  or 
define  the  character  of  the  paper  thus  eligible  for 
discount,  within  the  meaning  of  this  Act.  Nothing 
in  this  Act  contained  shall  be  construed  to  prohibit 
such  notes,  drafts,  and  bills  of  exchange,  secured 
by  staple  agricultural  products,  or  other  goods, 
wares,  or  merchandise,  from  being  eligible  for  such 
discount;  [or]  .  .  .  notes,  drafts,  or  bills  .  .  . 
issued  or  drawn  for  the  purpose  of  carrying  or 


Rediscounts 


57 


trading  in   .    .    .   bonds  and  notes  of  the  Govern- 
ment of  the  United  States." 

(Federal  Reserve  Act,  Section  13.) 

"The  Federal  reserve  banks  shall  be  authorized,  ^a7a^^ndan0cnebo,,d, 
subject  to  the  maturity  limitations  of  the  Federal  Corporation. 
Reserve  Act  and  to  regulations  of  the  Federal 
Reserve  Board,  to  discount  the  direct  obligations 
of  member  banks  secured  by  .  .  .  bonds  of  the 
[War  Finance]  Corporation  and  to  rediscount  eli- 
gible paper  secured  by  such  bonds  and  endorsed  by 
a  member  bank." 

(War  Finance  Corporation  Act,  Section  13.) 

Regulations  of  Federal  Reserve  Roard 

The  Federal  Reserve  Board,  exercising  its  statu- 
tory right  to  define  the  character  of  a  note,  draft,  or 
bill  of  exchange  eligible  for  rediscount  at  a  Fed- 
eral reserve  bank,  has  determined  that : 

It  must  be  a  note,  draft,  or  bill  of  exchange,  the  Commercial  paper, 
proceeds  of  which  have  been  used  or  are  to  be  used 
in  producing,  purchasing,  carrying,  or  marketing 
goods*  in  one  or  more  of  the  steps  of  the  process  of 
production,  manufacture,  or  distribution ; 

The  paper  may  be  secured  by  the  pledge  of  goods  Collateral  notes, 
or  collateral  provided  it  is  otherwise  eligible. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1917,  A,  II.) 

Opinions  and  Rulings 

Federal  reserve  banks   do  not  make  loans   di-  Loans  to  indmdaaU. 
rectly  to  individuals,  but  rediscount  the  paper  of 


*  When  used  in  this  regulation  the  word  "goods"  shall  be 
construed  to  include  goods,  wares,  merchandise,  or  agricul- 
tural products,  including  live  stock. 


58 


Commercial    Banking    Practice 


member  banks,  which  include  all  national  banks  and 
such  State  banks  as  may  have  joined  the  Federal 
Reserve  System. 

(Informal  Ruling,  Page  272,  June,  1916,  Bulletin.) 


Paper  of  waterworks 
company. 


Farmers'  notes. 


Assignment  of  open 
accounts  ineligible. 


Discount  of  renewal 
notes. 


Notes  Based  on  Production   and   Distribution    of    Goods. 

The  90-day  paper  of  a  waterworks  company,  the 
proceeds  of  winch  have  been  or  are  to  be  used  to 
provide  funds  for  payroll,  purchases  of  coal,  etc., 
is  eligible  for  rediscount  by  a  Federal  reserve  bank 
if  the  paper  is  otherwise  in  conformity  with  the  law 
and  the  provisions  of  the  Board's  regulations. 

(Informal  Ruling,  Page  527,  July,  1917,  Bulletin.) 

Farmers'  notes,  the  proceeds  of  which  are  used 
for  tilling  farms  or  for  draining  land  already  in 
use  as  farm  land,  should  be  classified  as  agricultural 
paper,  and  are  eligible  for  rediscount. 

(Informal  Ruling,  Page  743,  August,  1918,  Bulletin.) 

The  assignment  of  an  open  account  is  not  nego- 
tiable paper  and  is  not  eligible  for  rediscount  by  a 
Federal  reserve  bank  under  the  terms  of  section 
18  of  the  Federal  Reserve  Act. 

(Opinion  of  Counsel,  Page  227,  May,  1916,  Bulletin.) 

Renewals  differ,  and  banking  judgment  deter- 
mines the  merits  of  each  particular  case.  Self- 
liquidating  paper,  even  though  the  transaction 
which  gives  rise  to  it  does  not  liquidate  itself  within 
the  90-day  maturity,  might  be  discounted  even 
though  it  appears  to  be  renewal  paper.  Banks 
should  not  enter  into  an  agreement  for  a  renewal. 
Care  should  be  exercised  in  examining  such  paper 
and  the  transactions  which  give  rise  to  it,  but  me- 
chanical rules  should  not  be  allowed  to  take  the 
place  of  discriminating  banking  judgment. 

(Informal  Ruling,  Page  74,  June,  1915,  Bulletin.) 


Rediscounts 


59 


Secured  Notes. 


Eligibility  tested  by 
use  of  funds. 


Collateral  notes  for 
commercial    purposes. 


Under  section  13  of  the  Federal  Reserve  Act  the 
eligibility  of  a  note  for  rediscount  is  determined  by 
the  use  of  the  funds  derived  from  the  original  nego- 
tiation of  the  note.  The  collateral  security  of  the 
note  may  indicate  its  use,  but  the  form  of  collateral 
is  otherwise  immaterial.  In  other  words,  a  note 
might  be  secured  by  railroad  stocks  and  bonds,  but 
the  proceeds  might  be  used  for  an  agricultural, 
industrial,  or  a  commercial  purpose,  in  which  event 
the  note  would  be  eligible  for  rediscount,  although 
it  would  not  be  if  the  proceeds  were  used  to  pur- 
chase or  carry  the  railroad  stocks  and  bonds. 

(Opinion  of  Counsel,  Page  954,  December,  1917,  Bulletin.) 

Notes  secured  by  collateral,  the  proceeds  of 
which  have  been  used  or  are  to  be  used  for  commer- 
cial purposes,  and  which  otherwise  comply  with  the 
regulations,  are  eligible  for  rediscount. 

The  fact  that  commercial  paper  has  the  addi- 
tional security  of  collateral  in  no  way  affects  its 
eligibility  for  rediscount. 

(Informal  Ruling,  Page  268,  September,  1915,  Bulletin.) 

A  note,  even  though  secured  by  eligible  paper,  is  ^^t  security  not 
not  itself  eligible  for  rediscount  unless  issued  for  an 
agricultural,  commercial,  or  industrial  purpose. 

(Informal  Ruling,  Page  690,  September,  1917,  Bulletin.) 

The  note  of  a  manufacturer  secured  by  his  bills 
receivable  is  desirable  paper,  and  should  certainly 
not  be  debarred  as  a  collateral  trust  note. 

(Informal  Ruling,  Page  127,  July,  1915,  Bulletin.) 

A  note,  draft,  or  bill  of  exchange  drawn  for  com-  Collateral  of 
mercial  purposes  and  otherwise  eligible  for  redis- 
count under  the  provisions  of  section  13  of  the 
Federal  Reserve  Act  is  not  rendered  ineligible 
merely  because  it  is  secured  by  a  mortgage  on  real 
estate. 

(Opinion  of  Counsel,  Page  458,  June,  1917,  Bulletin.) 


Collateral   of  bills 
receivable. 


mortgages. 


50 


Commercial    Banking    Pract 


Rediscount  for 
insolvent  bank 
when  reopened. 


Notes   secured  by 
food  products. 


Pig  iron  security. 


The  Board  upholds  a  Federal  reserve  bank  in 
declining  to  give  assurance  to  the  receiver  of  an 
insolvent  member  bank  that  the  Federal  reserve 
bank  will  upon  the  reopening  of  the  insolvent  bank 
rediscount  eligible  paper  freely,  without  requiring 
the  indorsement  of  directors  or  other  additional  se- 
curity. Offerings  should  be  considered  upon  their 
merits. 

(Informal  Ruling,  Page  66,  February,  1916,  Bulletin.) 

Paper  secured  by  staple  perishable  food  products 
such  as  butter,  cheese,  eggs,  poultry,  frozen  fish, 
etc.,  carried  for  seasonable  periods  in  cold  storage 
on  negotiable  warehouse  receipts,  is  eligible,  if  of- 
fered with  the  indorsement  of  a  member  bank  at 
the  usual  rate  for  90-day  commercial  paper. 

(Informal  Ruling,  Page  30,  January,  1918,  Bulletin.) 

The  note  of  a  furnace  company  secured  by  pig 
iron  manufactured  by  the  company  on  contract  for 
delivery  is  eligible  for  rediscount.  While  this  prin- 
ciple generally  holds  good,  each  case  should  be 
carefully  scrutinized  that  the  collateral  may  be 
readily  marketable  goods. 

(Informal  Ruling,  Page  127,  July,  1915,  Bulletin.) 


Authority. 


Notes  Based  on  United  States  Obligations  and  War 
Finance  Corporation  Bonds. 

The  statement  of  law  that  the  definition  of  eli- 
gible paper  shall  not  include  notes,  drafts,  or  bills 
of  exchange  drawn  for  the  purpose  of  "carrying  or 
trading  in  stocks,  bonds,  or  other  investment  se- 
curities, except  bonds  and  notes  of  the  Government 
of  the  United  States,"  is  equivalent  to  an  affirma- 
tive declaration  that  a  Federal  reserve  bank  may 
discount  a  note,  draft,  or  bill  of  exchange  indorsed 
by  a  member  bank  which  is  issued  or  drawn  for  the 
purpose  of  carrying  or  trading  in  bonds  or  notes  of 
the  United  States. 

(Informal  Ruling,  Page  158,  March,  1917,  Bulletin.) 


Rediscounts  61 

Any  member  bank  which  has  loaned  money  to 
any  of  its  customers  for  the  purpose  of  carrying  or 
trading  in  bonds  or  notes  of  the  United  States  may 
rediscount  with  its  Federal  reserve  bank  the  bill 
or  note  of  its  customer,  provided  such  bill  or  note 

(a)  Has  a  maturity  at  the  time  of  discount  of  ^"^{J}"  of 
not  more  than  ninety  days,  exclusive  of  days  e  >gl  !  lty" 
of  grace;  and 

(b)  Has  the  indorsement  of  the  member  bank. 
Such  bill  or  note,  however,  need  not  necessarily 

be  secured  and  need  not  be  drawn  for  a  commercial 
purpose  other  than  for  the  purpose  of  carrying  or 
trading  in  notes  or  bonds  of  the  United  States. 

*      (Informal  Ruling,  Page  158,  March,  1917,  Bulletin.) 

A  member  bank  acting  through  another  member  Maturity  in  relation 
bank  may  obtain  the  discount  of  its  paper  secured  to  eli*ibility- 
by  Government  bonds  for  a  period  as  long  as  90 
days,  although  a  member  bank  acting  alone  may 
not  tender  its  collateral  note  to  the  Federal  reserve 
bank,  which  runs  for  more  than  15  days. 

It  may  be  proper  in  this  connection  to  consider 
questions  of  fact ;  but  in  case  a  country  bank  which 
has  regular  dealings  with  a  large  bank  in  a  city 
sends  its  note  secured  by  Government  bonds  to  that 
bank,  the  Board  would  regard  the  note  as  eligible 
for  rediscount  by  the  city  bank. 

(Informal  Ruling,  Page  863,  September,  1918,  Bulletin.) 

If  the  proceeds  of  a  note  have  been  used  or  are  to  Notes  of  nonmember 
be  used  to  carry  or  trade  in  United  States  obliga-  bank$* 
tions,  the  note,  if  acquired  in  good  faith,  should  be 
eligible  for  rediscount  with  the  indorsement  of  the 
member  bank,  whether  it  is  executed  by  a  member 
or  by  a  nonmember  bank. 

(Informal  Ruling,  Page  743,  August,  1918,  Bulletin.) 


62 


Commercial    Banking    Practice 


INELIGIBLE   CLASSES  OF  NOTES 

Statutory  ^Provisions 

Security  paper.  "Such   definition    [of  paper   eligible   for   redis- 

count] shall  not  include  notes,  drafts,  or  bills  cov- 
ering merely  investments  or  issued  or  drawn  for  the 
purpose  of  carrying  or  trading  in  stocks,  bonds,  or 
other  investment  securities,  except  bonds  and  notes 
of  the  United  States." 

(Federal  Reserve  Act,  Section  IS.) 


Notes  for   permanent, 
fixed,  or  speculative 
investments. 


Herniations  of  theiFederal  Reserve  Hoard 

The  paper  must  not  be  a  note,  draft,  or  bill  of 
exchange,  the  proceeds  of  which  have  been  used  or 
are  to  be  used  for  permanent  or  fixed  investments 
of  any  kind,  such  as  land,  buildings,  or  machinery. 

The  paper  must  not  be  a  note,  draft,  or  bill  of 
exchange,  the  proceeds  of  which  have  been  used  or 
are  to  be  used  for  investments  of  a  purely  specula- 
tive character. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1917,  A,  II.) 


Opinions  and  Rulings 


Discount  of  renewal 
notes. 


Extension. 


Renewals  and  Intensions. 

Renewals  differ,  and  banking  judgment  deter- 
mines the  merits  of  each  particular  case.  Those 
providing  working  capital  or  to  finance  fixed  in- 
vestments are  not  eligible  for  rediscount.  Banks 
should  not  enter  into  an  agreement  for  a  renewal. 

(Informal  Ruling,  Page  74,  June,  1915,  Bulletin.) 

A  note  or  draft  containing  a  provision  for  an 
extension  of  time  should  not  be  approved  for  gen- 
eral use  by  the  Federal  Reserve  Board. 

(Opinion  of  Counsel,  Page  870,  September,  1918,  Bulletin.) 


Rediscounts 


63 


Financial  Paper. 

A  note  executed  by  Bank  "A,"  and  discounted  Notes  ^replace 
by  Bank  "B,"  the  proceeds  of  which  were  used  to 
replace  funds  withdrawn  by  customers  to  purchase 
Liberty  Bonds,  is  not  eligible  for  rediscount  by  a 
Federal  reserve  bank,  since  the  proceeds  were  not 
used  for  an  agricultural,  industrial,  or  commercial 
purpose,  or  for  the  purchase  of  notes  or  bonds  of 
the  United  States. 

(Opinion  of  Counsel,  Page  954,  December,  1917,  Bulletin.) 

"Notes,  drafts,  and  bills  of  exchange  which  are  Paper  secured  by 
secured  by  war  savings  stamps  are  ineligible  for  war  sav,ngs  8tamp8* 
rediscount  with  a  Federal  reserve  bank." 

Counsel  suggests  that  war  savings  stamps  are 
not  bonds  or  notes  of  the  United  States  but  in  ef- 
fect only  receipts  for  payment  on  account  of  non- 
negotiable  evidences  of  indebtedness  (war  savings 
certificates) . 

(Opinion  of  Counsel,  Page  637,  July,  1918,  Bulletin.) 


Notes  of  acceptance 
house  or  broker. 


The  note  of  an  acceptance  house  or  broker,  se- 
cured by  acceptances  eligible  for  rediscount  at  a 
Federal  reserve  bank,  is  not  eligible  for  redis- 
count. 

The  note  of  the  acceptance  house  or  broker  can 
not  be  said  to  have  been  used  for  an  industrial,  agri- 
cultural, or  commercial  purpose,  since  the  business 
of  such  acceptance  house  or  broker  is  not  such  as  to 
come  within  any  of  these  classifications.  The  fact 
that  the  note  is  secured  by  eligible  paper  is  imma- 
terial if  the  proceeds  are  not  used  for  one  of  the 
purposes  named. 

(Informal  Ruling,  Page  108,  February,  1918,  Bulletin.) 

The  note  of  a  finance  or  credit  company  which  is  Notcs  °/  finance 
drawn  either  directly  or  indirectly  to  finance  some 
industrial  or  commercial  concern  in  the  transaction 
of  its  business  is  not  eligible  for  rediscount,  even 


64 


Commercial    Banking    Practice 


Collateral 
trust  notes. 


Collateral  of  bills 
receivable. 


Exchange  and 
collection  charges 
distinguished. 


Charges  before  and 
after  maturity. 


though  it  may  be  secured  by  paper  which  is  itself 
eligible  for  rediscount. 

(Informal  Ruling,  Page  197,  March,  1918,  Bulletin.) 

The  Board  holds  that  collateral  trust  notes  of  so- 
called  finance  companies  should  not  be  accepted  by 
Federal  reserve  banks  for  rediscount.  Such  a 
transaction  is  not  a  commercial  one. 

(Informal  Ruling,  Page  72,  June,  1915,  Bulletin.) 

The  note  of  a  manufacturer  secured  by  his  bills 
receivable  is  desirable  paper,  and  should  certainly 
not  be  debarred  as  a  collateral  trust  note.  When 
issued  for  the  purpose  of  carrying  collateral  for  a 
speculative  purpose  or  collateral  in  the  nature  of 
stocks  and  bonds  other  than  the  securities  of  the 
United  States,  the  note  would  not  be  eligible  for 
rediscount. 

(Informal  Ruling,  Page  127,  July,  1915,  Bulletin.) 
Bills  Payable  with  Collection  Charges. 

"A  bill  made  payable  with  'collection  charges' 
is  not  a  negotiable  instrument,  though  the  Nego- 
tiable Instruments  Law  provides  that  an  instru- 
ment payable  'with  exchange'  does  not  lose  its  ne- 
gotiability." 

Counsel  suggests  that  the  amount  of  exchange  is 
usually  ascertainable  in  advance  while  collection 
charges  are  not  so  ascertainable. 

(Opinion  of  Counsel,  Page  880,  November,  1917,  Bulletin.) 

"While  a  bill  containing  a  provision  for  payment 
of  the  costs  of  collection  and  attorney's  fees,  if  it  is 
dishonored  at  maturity,  is  a  valid  negotiable  instru- 
ment, a  bill  drawn  for  a  fixed  sum  'with  collection 
charges'  is  not  a  negotiable  instrument  unless  it  is 
so  drawn  as  to  show  that  no  collection  charges  are 
to  be  included  unless  the  bill  is  dishonored  at  ma- 
turity." 

(Opinion  of  Counsel,  Page  745,  August,  1918,  Bulletin.) 


Rediscounts  65 

EVIDENCE   OF  ELIGIBILITY  AND   RE- 
QUIREMENT  OF  STATEMENTS 

Regulations  of  the  Federal  Reserve  Board 

A  Federal  reserve  bank  must  be  satisfied  by  ref-  E7?A*™e  of 
erence  to  the  note  or  otherwise  that  it  is  eligible  for  e  lgI  '  lty* 
rediscount.  Compliance  of  a  note  [with  the  re- 
quirements of  eligibility]  .  .  .  may  be  evidenced 
by  a  statement  of  the  borrower  showing  a  reason- 
able excess  of  quick  assets  over  current  liabilities. 
The  member  bank  shall  certify  in  its  application 
whether  the  note  offered  for  rediscount  has  been 
discounted  for  a  depositor  or  another  member  bank 
or  whether  it  has  been  purchased  from  a  nonde- 
positor.  It  must  also  certify  whether  a  financial 
statement  of  the  borrower  is  on  file. 

Such  financial  statements  must  be  on  file  with  Financial  statements, 
respect  to  all  notes  offered  for  rediscount  which 
have  been  purchased  from  sources  other  than  a  de- 
positor or  a  member  bank.  With  respect  to  any 
other  note  offered  for  rediscount,  if  no  statement  is 
on  file,  a  Federal  reserve  bank  shall  use  its  discre- 
tion in  taking  the  steps  necessary  to  satisfy  itself 
as  to  eligibility.  It  is  authorized  to  waive  the  re-  Waiver  of  statement, 
quirement  of  a  statement  with  respect  to  any  note 
discounted  by  a  member  bank  for  a  depositor  or 
another  member  bank : 

( 1 )  If  it  is  secured  by  a  warehouse,  terminal,  or 
other  similar  receipt  covering  goods  in  storage; 

(2)  If  the  aggregate  of  obligations  of  the  bor- 
rower rediscounted  and  offered  for  rediscount  at 
the  Federal  reserve  bank  is  less  than  a  sum  equal  to 
10  per  cent  of  the  paid-in  capital  of  the  member 
bank  and  does  not  exceed  $5,000. 

(Regulations    of    Federal    Reserve    Board,    Regulation    A, 
Series  of  1917,  A,  IV.) 


66  Commercial    Banking    Practice 

Opinions  and  Rulings 

Cotton-mill  paper.  Banks   are   authorized   to   discount   cotton-mill 

paj)er  indorsed  by  member  banks  where  general 
conditions  are  satisfactory  and  statement  of  cot- 
ton mill  shows  that  plant  is  not  mortgaged  and  that 
the  deficiency  between  capital  and  plant  account 
does  not  amount  to  more  than  $5  per  spindle. 

(Informal  Ruling,  Page  73,  June,  1915,  Bulletin.) 

Standing  timber.  The  Board  does  not  regard  it  as  safe  policy  for 

Federal  reserve  banks  to  treat  timber  standing 
upon  tracts  of  land  as  quick  assets,  similar  to  manu- 
factured goods  in  the  hands  of  the  manufacturer  or 
jobber. 

(Informal  Ruling,  Page  126,  July,  1915,  Bulletin.) 

Unmined  mineral*.  Unmined  minerals   are   not   regarded   as   quick 

assets. 

(Informal  Ruling,  Page  126,  July,  1915,  Bulletin.) 


Commercial  paper. 


Agricultural  or  live 
stock  paper. 


MATURITY  OF  NOTES  ELIGIBLE 
FOR  REDISCOUNT 

Statutory  Provisions 

"Notes,  drafts,  and  bills  admitted  to  discount  un- 
der terms  of  this  paragraph  must  have  a  maturity 
at  the  time  of  discount  of  not  more  than  ninety 
days,  exclusive  of  days  of  grace:  Provided,  that 
notes,  drafts,  and  bills  drawn  or  issued  for  agricul- 
tural purposes  or  based  on  live  stock  and  having  a 
maturity  not  exceeding  six  months,  exclusive  of 
days  of  grace,  may  be  discounted  in  an  amount  to 
be  limited  to  a  percentage  of  the  assets  of  the  Fed- 
eral reserve  bank,  to  be  ascertained  and  fixed  by 
the  Federal  Reserve  Board." 

(Federal  Reserve  Act,  Section  13.) 


Rediscounts  67 

Re£ulationsfof  Federal! Reserve  Board 

Any  Federal  reserve  bank  may  discount  for  any  Maturity  of  90  days, 
of  its  member  banks  any  note,  draft,  or  bill  of  ex- 
change provided  it  has  a  maturity  at  the  time  of 
discount  of  not  more  than  ninety  days,  exclusive  of 
days  of  grace;  but  if  drawn  or  issued  for  agricul- 
tural purposes  or  based  on  live  stock,  it  may  have  JJ*^"  of  ,,x 
a  maturity  at  the  time  of  discount  of  not  more  than 
six  months,  exclusive  of  days  of  grace. 

(Regulations    of    Federal    Reserve    Board,    Regulation    A, 
Series  of  1917,  A,  I.) 

Opinions  and  Rulings 

A  bill  payable  "on  or  before"  a  certain  date  is  Notes  payable  n 
negotiable  paper  and,  if  otherwise  in  conformity 
with  the  provisions  of  law  and  of  the  Federal  He- 
serve  Act,  is  eligible  for  discount  by  a  Federal  re- 
serve bank. 

(Informal  Ruling,  Page  394,  August,  1916,  Bulletin.) 

A  demand  note  or  bill  is  not  eligible  under  the  Demand  note«- 
provisions  of  the  Act,  since  it  is  not  in  terms  pay- 
able within  the  prescribed  ninety  days,  but  may,  at 
the  option  of  the  holder,  not  be  presented  for  pay- 
ment until  after  that  time. 

If  the  bill  were  altered  so  as  to  read  "on  or  be- 
fore   ■  days  from  date,  pay  to  the  order  of 

ourselves,"  etc.,  it  would  come  within  the  terms  of 
the  law  and  would  be  eligible  for  rediscount. 

(Informal  Ruling,  Page  378,  May,  1917,  Bulletin.) 

*  A  note  made  payable  "on  demand,  and  if  no  de-  ^inpa^before 

mand  is  made,  then  on ,"  is  eligible  for 

rediscount  by  a  Federal  reserve  bank,  provided 
that  the  date  to  be  filled  in  is  not  more  than  90  days 
from  the  date  of  discount,  and  provided  further  it 
conforms  to  the  other  provisions  of  law  and  the 
regulations  of  the  Board. 

(Informal  Ruling,  Page  527,  July,  1917,  Bulletin.) 


68 


Commercial    Banking    Practice 


Extension  of  time. 


Direct  loans  and 

rediscounts 

distinguished. 


A  note  or  draft  containing  a  provision  for  an  ex- 
tension of  time  should  not  be  approved  for  general 
use  by  the  Federal  Reserve  Board. 

(Opinion  of  Counsel,  Page  870,  September,  1918,  Bulletin.) 

A  member  bank  acting  through  another  member 
bank  may  obtain  the  discount  of  its  paper  secured 
by  Government  bonds  for  a  period  as  long  as  90 
days,  although  a  member  bank  acting  alone  may 
not  tender  its  collateral  note  to  the  Federal  re- 
serve bank,  which  runs  for  more  than  15  days. 

It  may  be  proper  in  this  connection  to  consider 
questions  of  fact — whether  the  transaction  is  in 
good  faith  or  whether  the  two  banks  exchange 
courtesies  merely  for  the  purpose  of  having  their 
notes  discounted  for  90  days  instead  of  15  days; 
but  in  case  a  country  bank  which  has  regular  deal- 
ings with  a  large  bank  in  a  city  sends  its  note  se- 
cured by  Government  bonds  to  that  bank,  the 
Board  would  regard  the  note  as  eligible  for  redis- 
count by  the  city  bank. 

(Informal  Ruling,  Page  863,  September,  1918,  Bulletin.) 


Ten  per  cent  limit. 


Exception. 


AMOUNT   OF  PAPER  OF 

ONE   INTEREST   REDISCOUNTABLE 

FOR  ONE    MEMBER  BANK 

Statutory  Provisions 

"The  aggregate  of  such  notes,  drafts,  and  bills 
bearing  the  signature  or  indorsement  of  any  one 
borrower,  whether  a  person,  company,  firm,  or  cor- 
poration, rediscounted  for  any  one  bank  shall  at  no 
time  exceed  ten  per  centum  of  the  unimpaired  capi- 
tal and  surplus  of  said  bank;  but  this  restriction 
shall  not  apply  to  the  discount  of  bills  of  exchange 
drawn  in  good  faith  against  actually  existing 
values. " 

(Federal  Reserve  Act,  Section  13.) 


Rediscounts  69 

"No  Federal  reserve  bank  shall  be  permitted  to  Rediscoujtl 

J-  ror  member 

discount  for  any  [member]  State  bank  or  trust  state  banks, 
company  notes,  drafts,  or  bills  of  exchange  of  any 
one  borrower  who  is  liable  for  borrowed  money  to 
such  State  bank  or  trust  company  in  an  amount 
greater  than  ten  per  centum  of  the  capital  and  sur- 
plus of  such  State  bank  or  trust  company;  but  the 
discount  of  bills  of  exchange  drawn  against  actually 
existing  value  and  the  discount  of  commercial  or 
business  paper  actually  owned  by  the  person  nego- 
tiating the  same  shall  not  be  considered  as  borrowed 
money  within  the  meaning  of  this  section.  The 
Federal  reserve  bank,  as  a  condition  of  the  discount  Conditions, 
of  notes,  drafts,  and  bills  of  exchange  for  such  State 
bank  or  trust  company,  shall  require  a  certificate  or 
guaranty  to  the  effect  that  the  borrower  is  not  liable 
to  such  bank  in  excess  of  the  amount  provided  by 
this  section,  and  will  not  be  permitted  to  become 
liable  in  excess  of  this  amount  while  such  notes, 
drafts,  or  bills  of  exchange  are  under  discount  with 
the  Federal  reserve  bank." 

(Federal  Reserve  Act,  Section  9.) 


Re£ulations~of  Federal  Reserve  Board 

"The  aggregate  of  notes,  drafts,  and  bills  bear-  Ten  per  cent  limit, 
ing  the  signature  or  indorsement  of  any  one  bor- 
rower, whether  a  person,  company,  firm,  or  cor- 
poration, rediscounted  for  any  one  member  bank, 
shall  at  no  time  exceed  ten  per  cent  of  the  unim- 
paired capital  and  surplus  of  such  bank;  but  this  Exception, 
restriction  shall  not  apply  to  the  discount  of  bills 
of  exchange  drawn  in  good  faith  against  actually 
existing  values." 

(Regulations    of    Federal    Reserve    Board,    Regulation    A, 
Series  of  1917,  A,  I.) 


70 


Commercial    Banking    Practice 


Ten  per  cent  limit. 


Paper  of  one  maker 
or  indorser. 


Not  applicable  to 
rediscounting  bank. 


Paper  of  cotton 
broker. 


Opinions  and  Rulings 

A  Federal  reserve  bank  is  not  permitted  to  re- 
discount the  paper  of  a  customer  of  a  member  State 
bank  if  the  customer  is  indebted  to  the  member  bank 
in  an  amount  in  excess  of  ten  per  cent  of  the  capital 
and  surplus  of  the  member  bank. 

(Informal  Ruling,  Page  863,  September,  1918,  Bulletin.) 

If  any  particular  paper  presented  by  a  member 
bank  to  a  Federal  reserve  bank  for  rediscount, 
singly  or  added  to  the  paper  of  the  same  makers  or 
indorsers  which  the  Federal  reserve  bank  has  al- 
ready rediscounted  for  said  member  bank,  amounts 
to  a  total  of  more  than  ten  per  cent  of  the  unim- 
paired capital  and  surplus  of  that  bank,  the  Fed- 
eral reserve  bank  lias  no  authority  for  such  re- 
discount. 

(Informal  Ruling,  Page  224,  May,  1916,  Bulletin.) 

In  the  opinion  of  the  Board  the  limitations  con- 
tained iu  section  13  of  the  Federal  Reserve  Act  on 
the  rediscount  of  paper  bearing  the  signature  or 
indorsement  of  any  one  borrower  should  not  be  held 
to  refer  to  the  indorsement  of  a  nonmember  bank 
on  paper  rediscounted  with  a  member  bank. 

(Informal  Ruling,  Page  520,  June,  1918,  Bulletin.) 

A  cotton  broker  who  is  a  depositor  of  a  bank 
finances  cotton  for  various  mills  by  giving  to  the 
bank  his  note  secured  by  warehouse  receipts  of  the 
mills  indorsed  in  blank,  for  cotton  stored  in  his 
name  and  properly  insured,  but  sold  to  the  mill  for 
a  specific  amount  to  be  paid  at  a  specific  time,  as 
per  sales  note  attached.  The  question  arises 
whether  such  loans  taken  from  one  broker  in  ex- 
cess of  ten  per  cent  of  the  capital  and  surplus  of 
the  bank  would  be  an  excess  loan  under  the  Federal 
Reserve  Act,  if  the  financing  for  each  individual 


Rediscounts  71 

mill  and  the  accepted  sales  note  held  of  said  mill 
were  not  in  excess  of  said  ten  per  cent. 

It  is  held  that  the  transaction  in  form  is  merely  a 
discount  of  single  name  negotiable  paper  secured 
by  so  many  bales  of  cotton.  Such  notes  would 
clearly  come  within  the  provisions  of  section  5200 
of  the  Revised  Statutes.* 

The  language  of  section  13  of  the  Federal  Re- 
serve Act  is  still  more  comprehensive  and  no  Fed- 
eral reserve  bank  could  rediscount  such  notes  bear- 
ing the  name  of  one  broker  for  an  aggregate 
amount  in  excess  of  ten  per  cent  of  the  capital  and 
surplus  of  the  member  bank. 

(Informal  Ruling,  Page  113,  March,  1916,  Bulletin.) 

Relation  of  Section  5200,  Revised  Statutes,*  to  the  Ten 
Per  Cent  Limit. 

While  a  member  bank  may  acquire  commercial  J01T!raercial  or 

J  tl  business  paper. 

or  business  paper  from  the  same  person  in  excess 
of  ten  per  cent  of  its  unimpaired  capital  and  sur- 
plus, its  Federal  reserve  bank  can  not  rediscount 
such  paper  bearing  the  signature  or  indorsement  of 
the  same  person  in  excess  of  that  amount. 

Section  13,  Federal  Reserve  Act,  does  not  amend 
section  5200,  United  States  Revised  Statutes. 

(Opinion  of  Counsel,  Page  274,  June,  1916,  Bulletin.) 

A  note  or  bill  rediscounted  in  good  faith  by  a  Rediscounted  paper 
member  bank,  which  is  no  longer  owned  or  held  by  ^ctioTszoo/ 
the  bank,  need  not  be  included  as  a  liability  of  the 
maker  to  the  bank  within  the  meaning  of  section 
5200,  Revised  Statutes.  Notes  or  bills  rediscounted 
under  an  agreement  to  repurchase,  or  which  are 
merely  credited  to  the  account  of  the  bank  offering 
them  for  rediscount,  are  subject  to  the  limitations 
of  section  5200. 

(Opinion  of  Counsel,  Page  867,  September,  1918,  Bulletin.) 
*  For  section  5200  see  page  43,  above. 


72 


Commercial    Banking    Practice 


Rediscount  by  State 
member  banks. 


Where  a  State  bank,  which  is  a  member  of  the 
Federal  Reserve  System,  has  loaned  to  one  of  its 
customers  an  amount  equal  to  30  per  cent  of  its 
capital  and  surplus,  and  has  rediscounted  two- 
thirds  of  this  amount  with  a  correspondent  bank, 
the  remaining  one-third  is  eligible  for  rediscount 
with  its  Federal  reserve  bank. 

(Opinion  of  Counsel,  Page  638,  July,  1918,  Bulletin.) 


AGGREGATE  AMOUNT  REDISCOUNT- 
ABLE  FOR  ONE  BANK 

Statutory  Provisions 


Not  limited  by 
section  5202. 


Subject  to  regulations 
of  Federal  Reserve 
Board. 


"No  national  banking  association  shall  at  any 
time  be  indebted,  or  in  any  way  liable,  to  an  amount 
exceeding  the  amount  of  its  capital  stock  at  such 
time  actually  paid  in  and  remaining  undiminished 
by  losses  or  otherwise,  except  on  account  of  .  .  . 
liabilities  incurred  under  the  provisions  of  the  Fed- 
eral Reserve  Act." 

(Section  5202,  Revised  Statutes,  as  amended  by  Section  13, 
Federal  Reserve  Act.) 

"The  discount  and  rediscount  and  the  purchase 
and  sale  by  any  Federal  reserve  bank  of  any  bills 
receivable  and  of  domestic  and  foreign  bills  of  ex- 
change, and  of  acceptances  authorized  by  this  Act, 
shall  be  subject  to  such  restrictions,  limitations,  and 
regulations  as  may  be  imposed  by  the  Federal  Re- 
serve Board." 

(Federal  Reserve  Act,  Section  13.) 


Opinions  and  Rulings 

Not  limited  by  law.  The  law  places  no  limitation  upon  the  amount  of 
commercial  paper  which  a  member  bank  may  re- 
discount with  a  Federal  reserve  bank,  but  leaves 


Rediscounts  73 

this  to  the  judgment  of  the  officers  of  the  Federal 
reserve  bank. 

(Informal  Ruling,  Page  457,  September,  1916,  Bulletin.) 

Under  section  5202,  Revised  Statutes,  a  national  Discretion  of  Federal 
bank  may  not  borrow  as  bills  payable  in  excess  of  reserve 
its  capital  stock.    Under  the  Federal  Reserve  Act 
it  may  rediscount  actual  items  of  paper  in  its  pos- 
session to  any  amount  in  the  discretion  of  the  Fed- 
eral reserve  bank  of  its  district. 

(Informal  Ruling,  Page  112,  March,  1916,  Bulletin.) 

INDORSEMENT  OF  MEMBER  RANKS 
Statutory  Provisions 

"Upon  the  indorsement  of  any  of  its  member  indorsement. 
banks,  which  shall  be  deemed  a  waiver  of  demand, 
notice,  and  protest  by  such  bank  as  to  its  own  in- 
dorsement exclusively,  any  Federal  reserve  bank 
may  discount  notes,  drafts,  and  bills  of  exchange." 

(Federal  Reserve  Act,  Section  13.) 

Opinions  and  Rulings 


A  simple  written  indorsement  will  be  regarded  indorsement 
as  satisfactory  and  as  coming  within  the  terms  of  ] 
the  law. 

(Informal  Ruling,  Page  524,  October,  1916,  Bulletin.) 

If  a  note  is  otherwise  eligible  for  rediscount,  the  Without  recourse, 
fact  that  it  bears  a  "without  recourse"  indorsement 
of  a  nonmember  bank  will  not  affect  its  eligibility. 

(Opinion  of  Counsel,  Page  745,  August,  1918,  Bulletin.) 

REDISCOUNT  FOR  NONMEMBER 
BANKS 

Statutory  Provisions 

"No  member  bank  shall  act  as  the  medium  or   Procuring  rediscounts 

n  ill*  i     •  p  'or   nonmembers. 

agent  of  a  nonmember  bank  in  applying  tor  or  re- 


74 


Commercial    Banking    Practice 


ceiving  discounts  from  a  Federal  reserve  bank  un- 
der the  provisions  of  this  Act,  except  by  permission 
of  the  Federal  Reserve  Board." 

(Federal  Reserve  Act,  Section  19.) 


Opinions  and  Rulings 

Rediscount  of  paper         Assuming  that  the  paper  offered  by  a  member 
acquired  from  bank  f or  rediscount  is  eligible  under  the  regulations 

prescribed  by  the  Board,  it  would  be  necessary  in 
each  case  for  the  officers  of  the  Federal  reserve 
bank  to  determine  whether  or  not  the  proceeds  of 
such  discount  are  to  be  used  for  the  purpose  of  mak- 
ing a  loan  to  a  nonmember  bank.  If  the  money 
thus  borrowed  is  to  be  re-lent  to  a  nonmember 
bank,  rediscount  should  not  be  accepted  without 
the  permission  of  the  Federal  Reserve  Board.  If, 
on  the  other  hand,  a  member  bank  had  in  good 
faith  acquired  from  a  nonmember  bank  by  redis- 
count notes  which  are  eligible  under  the  regulations 
of  the  Board  for  rediscount  with  the  Federal  re- 
serve bank,  and  such  notes  were  held  as  a  part  of 
the  assets  of  the  member  bank,  there  would  seem  to 
be  no  objection  to  the  Federal  reserve  bank's  ac- 
cepting such  rediscounts,  provided  the  officers  are 
satisfied  that  the  transaction  is  a  bona  fide  trans- 
action and  that  the  member  bank  did  not  extend 
accommodation  to  the  nonmember  bank  with  a 
view  to  rediscounting  notes  so  acquired  with  the 
Federal  reserve  bank. 

This  is  one  of  the  cases  which  must  be  left  very 
largely  to  the  judgment  and  discretion  of  the  Fed- 
eral reserve  bank  officers;  and  a  determination 
must  be  reached  by  them  on  the  facts  of  the  case. 

(Informal  Ruling,  Page  213,  August,  1915,  Bulletin.) 

Rediscount  of  paper         In  the  opinion  of  the  Board  the  limitations  con- 

iodlremberybank.       tained  in  section  13  of  the  Federal  Reserve  Act  on 

the  rediscount  of  paper  bearing  the  signature  or  in- 


Rediscounts  75 

dorsement  of  any  one  borrower  should  not  be  held 
to  refer  to  the  indorsement  of  a  nonmember  bank 
on  paper  rediscounted  with  a  member  bank. 

It  is  true  that  in  such  case  the  nonmember  bank 
is  contingently  liable  if  the  paper  is  not  paid  at  ma- 
turity, but  the  Board  is  inclined  to  the  view  that 
this  language  refers  to  paper  bearing  the  signature 
or  indorsement  of  borrowers  or  customers  of  the 
member  bank  and  not  to  the  indorsement  of  other 
banks.  A  nonmember  bank  could  not,  of  course, 
obtain  indirect  accommodation  from  the  Federal 
reserve  bank  through  the  medium  or  agency  of  a 
member  bank  except  with  the  permission  of  the 
Federal  Reserve  Board,  but  if  a  member  bank  had 
acquired  eligible  paper  in  due  course  by  rediscount 
from  a  nonmember  bank  the  member  bank  should 
hardly  be  precluded  from  rediscounting  this  paper 
with  the  Federal  reserve  bank  because  it  bears  the 
indorsement  of  the  nonmember  bank. 

(Informal  Ruling,  Page  520,  June,  1918,  Bulletin.) 


T<5 


Rediscount  of   Drafts   and   Trade 
Acceptances 

DEFINITION  OF  DRAFT 


Draft  or  bill 
of   exchange. 


Regulations  of  Federal  Reserve  Board 

A  draft  or  bill  of  exchange,  within  the  meaning 
of  this  regulation,  is  defined  as  an  unconditional 
order  in  writing,  addressed  by  one  person  to  an- 
other, other  than  a  banker  .  .  .  signed  by  the  per- 
son giving  it,  requiring  the  person  to  whom  it  is 
addressed  to  pay,  in  the  United  States,  at  a  fixed  or 
determinable  future  time,  a  sum  certain  in  dollars 
to  the  order  of  a  specified  person. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1917,  A,  V.) 


Extension 
of  time. 


Presentment 
of  bills  for 
acceptance. 


Acceptor  not 
affected  by 


Opinions  and  Rulings 

A  note  or  draft  containing  a  provision  for  an  ex- 
tension of  time  should  not  be  approved  for  general 
use  by  the  Federal  Reserve  Board. 

(Opinion  of  Counsel,  Page  870,  September,  1918,  Bulletin.) 

The  drawer  and  indorser  of  a  bill  of  exchange 
made  payable  on  a  date  specified  in  the  bill  are  not 
discharged  by  a  failure  to  present  for  acceptance, 
unless  the  bill  expressly  provides  that  it  must  be 
presented  for  that  purpose,  or  unless  it  is  payable 
elsewhere  than  at  the  residence  or  place  of  busi- 
ness of  the  drawee. 

(Opinion  of  Counsel,  Page  608,  November,  1916,  Bulletin.) 

The  acceptor  of  a  bill  of  exchange  is  the  prin- 
cipal debtor.  The  law  requires  that  notice  of  de- 
mand and  protest  be  given  to  parties  secondarily 


Rediscounts  77 

liable  in  case  of  dishonor.  This  right  to  receive 
notice  is  a  personal  one  which  may  be  waived  by 
the  parties  entitled  thereto,  that  is,  the  drawer  and 
indorser;  but  such  waiver  has  no  effect  on  the  ac- 
ceptor or  principal  debtor. 

(Opinion  of  Counsel,  Page  277,  September,  1915,  Bulletin.) 
Negotiability. 

The  negotiability  of  a  bill  of  exchange  is  not  af-  Effect  of 
fected  by  provisions  which  waive  demand,  notice,  waivers, 
and   protest;   which   waive   homestead   exemption 
rights ;  and  which  provide  for  the  costs  of  collection 
and  attorney's  fees. 

(Opinion  of  Counsel,  Page  226,  May,  1916,  Bulletin.) 

A  provision  in  a  draft  or  bill  of  exchange  that  it  Dfaft*  payable 
is  payable  "with  interest  at  the  rate  of  —  per  cent 
per  annum  after  maturity,  if  payment  is  delayed," 
does  not  affect  the  negotiability  of  the  instrument. 

(Opinion  of  Counsel,  Page  200,  March,  1917,  Bulletin.) 

A  draft  made  "payable  on  arrival  of  car"  is  non-  Drafts  payable 
negotiable,  not  being  payable  at  a  determinable  on  condltlon- 
future  time. 

(Opinion  of  Counsel,  Page  219,  August,  1915,  Bulletin.) 

"A  bill  made  payable  with  'collection  charges'  is  Exchange  and 
not  a  negotiable  instrument,  though  the  Negotiable  charges!0 
Instruments  Law  provides  that  an  instrument  pay- 
able 'with  exchange'  does  not  lose  its  negotiability." 

Counsel  suggests  that  the  amount  of  exchange  is 
usually  ascertainable  in  advance  while  collection 
charges  are  not  so  ascertainable. 

(Opinion  of  Counsel,  Page  880,  November,  1918,  Bulletin.) 

While  a  bill  containing  a  provision  for  payment  ^r^J^Tll 
of  the  costs  of  collection  and  attorney's  fees,  if  it  is 
dishonored  at  maturity,  is  a  valid  negotiable  instru- 
ment, a  bill  drawn  for  a  fixed  sum  "with  collection 
charges"  is  not  a  negotiable  instrument  unless  it 


78 


Commercial    Banking    Practice 


Drafts  payable 

to  order  of  drawee. 


Trade  acceptance. 


Acceptance 
by  drawee. 


Place  of  payment 
of  acceptance. 


Discount  for 
payment  at 
maturity. 


is  so  drawn  as  to  show  that  no  collection  charges  are 
to  be  included  unless  the  bill  is  dishonored  at 
maturity. 

(Opinion  of  Counsel,  Page  745,  August,  1918,  Bulletin.) 

A  bill  made  payable  to  the  order  of  the  drawee  is 
not  negotiable  until  the  drawee  as  payee  has  in- 
dorsed it.  When  it  has  been  accepted  and  indorsed 
by  the  drawee  it  is  a  valid  negotiable  instrument  in 
the  hands  of  a  third  party,  and  the  drawer  is  not 
released,  since  the  terms  of  his  order  have  been 
specifically  complied  with. 

(Opinion  of  Counsel,  Page  110,  February,  1918,  Bulletin.) 

DEFINITION  OF  TRADE  ACCEPTANCE 

Regulations  of  Federal  Reserve  Roard 

A  trade  acceptance  is  defined  as  a  draft  or  bill  of 
exchange  drawn  by  the  seller  on  the  purchaser  of 
goods  sold,  and  accepted  by  such  purchaser. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1917,  A,  V.) 

Opinions  and  Rulings 

A  draft  to  be  eligible  as  a  trade  acceptance  must 
be  accepted  by  the  drawee  and  not  by  anyone  else. 

(Informal  Ruling,  Page  112,  March,  1916,  Bulletin.) 

An  acceptance  to  pay  at  a  particular  place  differ- 
ent from  the  residence  of  the  acceptor  is  a  general 
acceptance,  unless  it  expressly  states  that  the  bill  is 
to  be  paid  there  and  not  elsewhere,  and  does  not 
render  the  bill  nonnegotiable. 

(Opinion  of  Counsel,  Page  289,  April,  1917,  Bulletin.) 

A  trade  acceptance  which  consists  of  an  order 
to  pay  a  certain  amount,  which  is  the  amount  of  the 
debt  minus  a  discount  for  prompt  payment  at  ma- 


Discount  for 
prepayment. 


Rediscounts  79 

turity,  or,  if  not  paid  at  maturity,  to  pay  a  greater 
amount,  which  is  the  amount  of  the  debt  without 
any  discount,  is  an  order  to  pay  a  sum  certain  and 
is  negotiable. 

(Opinion  of  Counsel,  Page  200,  March,  1918,  Bulletin.) 

A  trade  acceptance  providing  for  a  fixed  dis- 
count, if  paid  at  a  certain  time  before  maturity, 
should  not  be  approved  for  general  use  by  the  Fed- 
eral Reserve  Board. 

(Opinion  of  Counsel,  Page  871,  September,  1918,  Bulletin.) 

On  the  basis  of  the  facts  submitted  in  this  case,  it  f0cr"p^ip^aesnetds  on 
is  held  that  a  90-day  sight  draft  drawn  by  a  firm  in 
Calcutta  on  a  company  in  Boston  and  accepted  by 
that  firm,  covering  a  transaction  involving  the 
transportation  of  merchandise  from  Calcutta  to 
Honolulu,  is  a  trade  acceptance  rather  than  a 
banker's  acceptance. 

(Informal  Ruling,  Page  404,  December,  1915,  Bulletin.) 

ELIGIBLE  DRAFTS  AND  TRADE 
ACCEPTANCES 

Statutory  Provisions 

Eligible  paper  is  defined  in  the  laws  as  follows: 
"Notes,  drafts,  and  bills  of  exchange  issued  or  Commercial  paper, 
drawn  for  agricultural,  industrial,  or  commercial 
purposes,  or  the  proceeds  of  which  have  been  used, 
or  are  to  be  used,  for  such  purposes,  the  Federal 
Reserve  Board  to  have  the  right  to  determine  or  de- 
fine the  character  of  the  paper  thus  eligible  for  dis- 
count, within  the  meaning  of  this  Act.    Nothing  in 
this  Act  contained  shall  be  construed  to  prohibit  Agricultural  and 
such  notes,  drafts,  and  bills  of  exchange,  secured  by  commodlty  paper' 
staple  agricultural  products,  or  other  goods,  wares, 
or  merchandise  from  being  eligible  for  such  dis- 
count; [or]  .   .   .  notes,  drafts,  or  bills  .   .   .  issued 


80 


Commercial    Banking    Practice 


Paper  based  on 
United  States 
obligations. 


Paper  based  en 
bonds  of  War 
Finance  Corporation. 


Conditions  of 
eligibility. 


Commercial 
origin. 


or  drawn  for  the  purpose  of  carrying  or  trading  in 
.  .  .  bonds  and  notes  of  the  Government  of  the 
United  States." 

(Federal  Reserve  Act,  Section  IS.) 

"The  Federal  reserve  banks  shall  be  authorized, 
subject  to  the  maturity  limitations  of  the  Federal 
Reserve  Act  and  to  regulations  of  the  Federal  Re- 
serve Board  ...  to  rediscount  eligible  paper 
secured  by  .  .  .  bonds  [of  the  War  Finance  Cor- 
poration] and  indorsed  by  a  member  bank." 

(War  Finance  Corporation  Act,  Section  13.) 

Herniations  of  Federal  Reserve  Board 

The  Federal  Reserve  Board,  exercising  its  statu- 
tory right  to  define  the  character  of  a  note,  draft,  or 
bill  of  exchange  eligible  for  rediscount  at  a  Federal 
reserve  bank,  has  determined  that: 

It  must  be  a  note,  draft,  or  bill  of  exchange,  the 
proceeds  of  which  have  been  used  or  are  to  be  used 
in  producing,  purchasing,  carrying,  or  marketing 
goods*  in  one  or  more  of  the  steps  of  the  process  of 
production,  manufacture,  or  distribution; 

It  may  be  secured  by  the  pledge  of  goods  or 
collateral,  provided  it  is  otherwise  eligible. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1917,  A,  II.) 


Based  on  retail 
transactions. 


Opinions  and  Rnlings 

A  bill  of  exchange  drawn  by  the  seller  of  goods 
and  accepted  by  the  purchaser  of  those  goods  is  a 
trade  acceptance,  regardless  of  whether  or  not  the 
purchaser  intends  to  resell  the  goods  or  to  use  them 


*  When  used  in  this  regulation  the  word  "goods"  shall  be 
construed  to  include  goods,  wares,  merchandise,  or  agricultural 
products,  including  live  stock. 


tale  DISCOUNTS  81 

for  his  own  purpose.  Therefore,  a  retail  dealer 
may  finance  the  sale  of  his  goods  to  a  retail  cus- 
tomer by  means  of  the  trade  acceptance. 

(Informal  Ruling,  Page  30,  January,  1918,  Bulletin.) 

An  acceptance  drawn  by  a  gas  producing  com-  ?a,s.ed  on  f ale  and 

-,.,.1,.       J  or  -.        &  ,    delivery  of  gas. 

pany  on  a  gas  distributing  company  and  accepted 
by  the  latter  in  payment  for  gas  sold  and  delivered 
is  a  trade  acceptance,  eligible  for  rediscount  by  a 
Federal  reserve  bank. 

(Informal  Ruling,  Page  435,  May,  1918,  Bulletin.) 

Regarding  the  use  of  trade  acceptances  in  con-  &a"d  °n  in*jaU- 
nection  with  the  sale  of  coffee  mills,  etc.,  on  an  in- 
stallment plan,  if  the  purchaser  is  willing  to  accept 
a  draft  in  advance  of  the  delivery  of  the  goods  there 
would  seem  to  be  no  reason  why  such  an  acceptance 
should  not  be  treated  on  the  same  basis  as  a  bill 
drawn  and  accepted  after  delivery  of  such  goods. 

(Informal  Ruling,  Page  437,  May,  1918,  Bulletin.) 

Drafts  drawn  for  the  purchase  price  of  electrical  ?as*d  °° electrical 

,.,.,,         ,x  „.  n       ■  installation. 

goods,  which  include  the  cost  ot  installation,  may 
be  treated  as  trade  acceptances  when  such  drafts 
are  accepted  by  the  purchaser. 

(Informal  Ruling,  Page  310,  April,  1918,  Bulletin.) 

A  draft  drawn  bv  a  lumber  corporation  upon  a  Acceptances  of 

i  .•  i  •    i      •.  j  i_  j»      j.u  saIes  corporations. 

sales  corporation  which  it  and  a  number  of  other 
lumber  concerns  have  organized  will,  when  ac- 
cepted, become  a  trade  acceptance,  even  though  the 
selling  corporation  is  a  stockholder  of  the  sales  cor- 
poration, provided  the  latter  is  organized  in  good 
faith  and  not  merely  to  act  as  an  agent  for  the  pur- 
pose of  evading  the  law. 

(Opinion  of  Counsel,  Page  33,  January,  1918,  Bulletin.) 

A  bill  drawn  by  a  retail  dealer  on  his  retail  cus-  Acceptances  in 

i  t  p  i  iii  liquidation  or 

tomer  to  finance  the  sale  ot  goods  to  that  customer  0Pen  accounts, 
is  a  trade  acceptance  within  the  meaning  of  the 
Board's  regulations,  even  though  it  is  drawn  after 


82 


Commercial    Banking    Practice 


the  purchaser  has  failed  to  remit  promptly  on  an 
open  account. 

The  Board  is  of  the  opinion,  however,  that  the 
attempt  to  use  a  trade  acceptance  in  this  manner  as 
a  means  of  liquidating  an  otherwise  slow  account 
would  involve  considerable  danger  to  the  primary 
purposes  of  the  trade  acceptance  movement  and 
would  subordinate  the  trade  acceptance  to  the  open 
account  by  suggesting  it  as  a  last  resort  for  bad 
debts. 

While,  therefore,  trade  acceptances  of  this  char- 
acter should  probably  be  considered  eligible  as  a 
matter  of  law,  nevertheless  member  banks  and  Fed- 
eral reserve  banks  should  be  encouraged  to  discrim- 
inate against  them  as  far  as  possible. 

(Informal  Ruling,  Page  30,  January,  1918,  Bulletin.) 


Acceptances  based 
on  advertising  space. 


The  Federal  Reserve  Board  may  properly  rule 
that  a  draft  or  bill  of  exchange  drawn  by  the  seller 
on  the  purchaser  of  advertising  space  and  accepted 
by  such  purchaser  is  a  trade  acceptance. 

(Opinion  of  Counsel,  Page  116,  February,  1917,  Bulletin.) 


Conditions. 


A  draft  or  bill  of  exchange  drawn  by  a  publisher 
or  other  advertising  agency  on  the  purchaser  of  ad- 
vertising space,  and  accepted  by  such  purchaser, 
shall  be  considered  a  trade  acceptance  provided  the 
advertisement  on  which  the  draft  or  bill  is  based  is 
for  the  purpose  of  promoting  or  facilitating  the 
production,  manufacture,  distribution,  or  sale  of 
goods,  whether  merchandise  or  agricultural  prod- 
ucts, including  live  stock,  and  provided,  further, 
that  such  advertisement  is  not  illegal  and  is  not  for 
the  purpose  of  promoting  or  facilitating  any  trans- 
action which  is  prohibited  by  the  laws  of  the  state 
in  which  it  is  to  be  consummated. 

(Informal  Ruling,  Page  114,  February,  1917,  Bulletin.) 


Rediscounts  83 

Acceptances  Based  on  Foreign  Transactions. 

The  fact  that  importation  or  exportation  is  in-  fraasne8dac°t"0^port 
volved  does  not  exclude  the  character  of  a  trade  ac- 
ceptance, and  trade  acceptances  originating  through 
importation  from  foreign  countries,  which  are  in- 
dorsed by  banks  or  bankers,  may  be  taken  within 
the  range  of  the  discount  rates  for  bankers'  ac- 
ceptances. 

(Informal  Ruling,  Page  168,  April,  1916,  Bulletin.) 

Bills  drawn  for  the  purpose  of  providing  funds  ^t^T*™ 
for  the  purchase  and  export  of  cross-ties  and  lum- 
ber to  Cuba  are  eligible  for  rediscount  if  properly 
indorsed  and  otherwise  conforming  to  the  regula- 
tions of  the  Federal  Reserve  Board. 

(Informal  Ruling,  Page  268,  September,  1915,  Bulletin.) 

INELIGIBLE  DRAFTS  AND  TRADE 
ACCEPTANCES 

Statutory  Provisions 

"Such  definition  [of  paper  eligible  for  rediscount]  Security  paper, 
shall  not  include  notes,  drafts,  or  bills  covering 
merely  investments  or  issued  or  drawn  for  the  pur- 
pose of  carrying  or  trading  in  stocks,  bonds,  or 
other  investment  securities,  except  bonds  and  notes 
of  the  United  States." 

(Federal  Reserve  Act,  Section  13.) 

Regulations  of  the  Federal  Reserve  Roard 

The  paper  must  not  be  a  note,  draft,  or  bill  of  Notes  for 
exchange,  the  proceeds  of  which  have  been  used  or  E™^^' 
are  to  be  used  for  permanent  or  fixed  investments  investments, 
of  any  kind,  such  as  land,  buildings,  or  machinery. 

The  paper  must  not  be  a  note,  draft,  or  bill  of 
exchange,  the  proceeds  of  which  have  been  used  or 
are  to  be  used  for  investments  of  a  purely  specula- 
tive character. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1917,  A,  II.) 


84 


Commercial    Banking    Practice 


Acceptances 
based  on  future 
purchases. 


Drafts  to  finance 
capital  requirements. 


Drafts  in  payment 
of  insurance 
premiums. 


Character  of 
evidence. 


Opinions  and  Rulings 

A  bill,  in  order  to  be  a  trade  acceptance,  must 
arise  out  of  the  purchase  of  goods,  and  unless  that 
purchase  is  either  consummated  or  actually  con- 
tracted for  at  the  time  the  bill  is  drawn,  it  is  doubt- 
ful whether  it  can  properly  be  said  that  the  obliga- 
tion arises  out  of  the  purchase  of  goods. 

(Informal  Ruling,  Page  378,  May,  1917,  Bulletin.) 

The  Board's  conception  of  the  trade  acceptance 
is  that  it  is  an  instrument  which  carries  upon  its 
face  the  evidence  of  the  commercial  character  of  the 
transaction  which  gave  it  birth.    The  finance  paper 

of    the    Corporation    issued    against    drafts 

drawn  by  it  on  dealers  and  placed  in  trust  to  secure 
such  paper  issued  by  it  in  the  shape  of  notes  or 
certificates  gives  no  indication  whatever  as  to  the 
nature  of  the  security,  which  may  or  may  not  be 
eligible  paper. 

It  appears  to  the  Board  that  the Corpora- 
tion by  issuing  notes  of  this  character  is  really  rais- 
ing money  for  capital  requirements  for  similar 
transactions  in  the  future,  and  that  the  whole  plan 
is  in  essence  a  finance  operation  rather  than  a 
commercial  transaction. 

(Informal  Ruling,  Page  109,  February,  1918,  Bulletin.) 

A  draft  drawn  by  a  casualty  company  against  a 
policyholder  for  premiums  could  hardly  be  said  to 
be  a  draft  by  the  seller  on  the  purchaser  of  goods 
sold  and  would  not,  in  the  opinion  of  the  Board, 
come  within  the  Board's  present  definition  of  a 
trade  acceptance. 

(Informal  Ruling,  Page  309,  April,  1918,  Bulletin.) 

EVIDENCE  OF  ELIGIBILITY 

Regulations  of  Federal  Reserve  Board 

A  Federal  reserve  bank  shall  take  such  steps  as 
it  deems  necessary  to  satisfy  itself  as  to  the  eligibil- 


Rediscounts  85 

ity  of  the  draft  or  bill  offered  for  rediscount,  unless 
it  presents  prima  facie  evidence  thereof  or  bears 
a  stamp  or  certificate  affixed  by  the  acceptor  or 
drawer  showing  that  it  is  a  trade  acceptance. 

(Regulations    of    Federal    Reserve    Board,    Regulation    A, 
Series  of  1917,  A,  V.) 

Opinions  and  Killings 

The  fact  that  a  land  company  has  stamped  a  bill  ^ccTtlTc?"  \a$ 
a  trade  acceptance  and  has  signed  such  statement  no  value, 
as  "acceptor"  does  not  in  itself  make  it  a  trade  ac- 
ceptance. The  bill  was  accepted  by  the  bank  and 
not  by  the  land  company  and  is  therefore  not  eligi- 
ble for  purchase  as  a  trade  acceptance  under  the 
regulation  which  requires  a  bill  to  be  accepted  by 
the  drawee. 

(Informal  Ruling,  Page  112,  March,  1916,  Bulletin.) 

MATURITY 

Statutory^Provisions 

"Notes,  drafts,  and  bills  admitted  to  discount  Commercial  paper, 
under  terms  of  this  paragraph  must  have  a  matur- 
ity at  the  time  of  discount  of  not  more  than  ninety 
days,  exclusive  of  days  of  grace :     Provided,  that  Agricultural  or  Iive 
notes,  drafts,  and  bills  drawn  or  issued  for  agri-  stoc  paper* 
cultural  purposes  or  based  on  live  stock  and  hav- 
ing a  maturity  not  exceeding  six  months,  exclusive 
of  days  of  grace,  may  be  discounted  in  an  amount  to 
be  limited  to  a  percentage  of  the  assets  of  the  Fed- 
eral reserve  bank,  to  be  ascertained  and  fixed  by  the 
Federal  Reserve  Board." 

(Federal  Reserve  Act,  Section  IS.) 

Regulations  of  Federal  Reserve  Roard 

The  draft  or  trade  acceptance  must  have  a  "ma-  ^*"ritJa°[ 
turity  at  the  time  of  discount  of  not  more  than 


Commercial    Banking    Practice 


Maturity  of 
six  months. 


ninety  days,  exclusive  of  days  of  grace;  but  if 
drawn  or  issued  for  agricultural  purposes  or  based 
on  live  stock,  it  may  have  a  maturity  at  the  time  of 
discount  of  not  more  than  six  months,  exclusive 
of  days  of  grace." 

(Regulations    of    Federal    Reserve    Board,    Regulation    A, 
Series  of  1917,  A,  I.) 


Opinions  and  Rulings 


Drafts  payable 
on  condition. 


Drafts  payable 
"on  or  before" 
certain  date. 


Demand  drafts. 


Extension. 


A  draft  made  "payable  on  arrival  of  car"  is  non- 
negotiable,  not  being  payable  at  a  determinable 
future  time,  and  is  therefore  ineligible  for  redis- 
count by  a  Federal  reserve  bank. 

(Opinion  of  Counsel,  Page  219,  August,  1915,  Bulletin.) 

Drafts  payable  "ninety  days  from  date  or  before 
on  five  days  after  demand  (i.e.,  on  five  days'  notice) 
by  the  holder  hereof"  are  negotiable  and  eligible  for 
discount  with  a  Federal  reserve  bank. 

(Opinion  of  Counsel,  Page  291,  April,  1917,  Bulletin.) 

A  demand  note  or  bill  is  not  eligible  under  the 
provisions  of  the  Act,  since  it  is  not  in  terms  pay- 
able within  the  prescribed  ninety  days,  but,  at  the 
option  of  the  holder,  may  not  be  presented  for  pay- 
ment until  after  that  time. 

If  the  bill  were  altered  so  as  to  read  "on  or  before 

days  from  date,  pay  to  the  order  of  ourselves," 

etc.,  it  would  come  within  the  terms  of  the  law  and 
would  be  eligible  for  rediscount. 

(Informal  Ruling,  Page  378,  May,  1917,  Bulletin.) 

"A  note  or  draft  containing  a  provision  for  an 
extension  of  time  should  not  be  approved  for  gen- 
eral use  by  the  Federal  Reserve  Board." 

(Opinion  of  Counsel,  Page  870,  September,  1918,  Bulletin.) 


Rediscounts  C 

AMOUNT  OF  PAPER  OF  ONE  INTEREST 

REDISCOUNTARLE  FOR  ONE 

MEMRER  RANK 

Statutory  Provisions 

"The  aggregate  of  such  notes,  drafts,  and  bills  Ten  per  cent 
bearing  the  signature  or  indorsement  of  any  one  hm,t" 
borrower,  whether  a  person,  company,  firm,  or  cor- 
poration, rediscounted  for  any  one  bank  shall  at 
no  time  exceed  ten  per  centum  of  the  unimpaired 
capital  and  surplus  of  said  bank;  but  this  restric- 
tion shall  not  apply  to  the  discount  of  bills  of  ex-  Exception, 
change  drawn  in  good  faith  against  actually  exist- 
ing values." 

(Federal  Reserve  Act,  Section  13.) 

Regulations  of  Federal  Reserve  Roard 

"The  aggregate  of  notes,  drafts,  and  bills  bear-  Ten  per  cent 

&&      &  7  .        »  i  limit- 

ing the  signature  or  indorsement  ot  any  one  bor- 
rower, whether  a  person,  company,  firm,  or  corpora- 
tion, rediscounted  for  any  one  member  bank,  shall 
at  no  time  exceed  ten  per  cent  of  the  unimpaired 
capital  and  surplus  of  such  bank;  but  this  restric- 
tion shall  not  apply  to  the  discount  of  bills  of  ex-  Exception, 
change  drawn  in  good  faith  against  actually  exist- 
ing values." 

(Regulations    of    Federal    Reserve    Board,    Regulation    A, 
Series  of  1917,  A,  I.) 

Opinions  and  Rulings 

What  Constitutes  "Actually  Existing  Values." 

A  bill  of  exchange  discounted  before  acceptance  Drafts  discounted 

,S  .,  n  ■    .• before  acceptance. 

may  be  said  to  be  drawn  against  actually  existing 
values,  within  the  meaning  of  section  13  of  the 
Federal  Reserve  Act,  when  and  on^  when  it  is 


88 


Commercial    Banking    Practice 


Trade   acceptances. 


Trade  acceptances 
for  long  standing 
open  accounts. 


Evidence   of 
"actually  existing 
value." 


Qualified 
acceptances. 


accompanied  by  shipping  documents,  warehouse  re- 
ceipts, or  other  papers  securing  title  to  the  goods 
sold. 

An  accepted  bill  of  exchange,  unaccompanied  by 
shipping  documents  or  other  such  papers,  may  be 
considered  as  drawn  against  actually  existing 
values  if  drawn  against  the  drawee  at  the  time  of, 
or  within  a  reasonable  time  after,  the  shipment  or 
delivery  of  the  goods  sold.  In  this  latter  case  there 
must  be  reasonable  grounds  to  believe  that  the 
goods  are  in  existence  in  the  hands  of  the  drawee 
either  in  their  original  form  or  in  the  shape  of  the 
proceeds  of  their  sale. 

(Opinion  of  Counsel,  Page  195,  March,  1917,  Bulletin.) 

A  bill  drawn  for  a  balance  due  on  open  account 
of  long  standing,  which  is  accepted  by  the  debtor, 
might  constitute  a  trade  acceptance,  but  in  order 
for  it  to  be  excepted  from  the  limitations  imposed 
by  section  13  of  the  Federal  Reserve  Act  as  a  bill  of 
exchange  drawn  against  actually  existing  value,  it 
must  have  been  drawn  contemporaneously  with,  or 
within  such  a  reasonable  time  after,  the  shipment  of 
the  goods  as  to  justify  the  assumption  that  the 
goods  are  in  the  hands  of  the  drawee  in  their  original 
form  or  in  the  form  of  proceeds  of  sale. 

As  evidence  of  this  fact,  Federal  reserve  banks 
might  reasonably  require  such  trade  acceptances  as 
are  offered  as  "bills  of  exchange  drawn  against 
actually  existing  value"  to  show  the  date  of  invoice, 
so  that  it  may  be  determined  whether  or  not  the  ac- 
count is  one  of  long  standing. 

(Informal  Ruling,  Page  287,  April,  1917,  Bulletin.) 

A  bill  of  exchange  drawn  payable  "at  sight"  and 
accepted  payable  in  three  months  is  a  qualified  or 
conditional  acceptance,  and  the  maker  and  prior 
indorsers  are  released.  The  instrument  in  effect 
becomes  the  promissory  note  of  the  acceptor,  and 


Rediscounts  89 

would  not  come  within  the  exception  to  section  5200 
[or  section  13]  as  a  "bill  of  exchange"  drawn  in 
good  faith  against  actually  existing  value. 

(Opinion  of  Counsel,  Page  463,  September,  1916,  Bulletin.) 

For  additional  opinions  and  rulings  under  this 
heading,  but  relating  also  to  promissory  notes,  see 
pages  68-72,  above. 

AGGREGATE    AMOUNT     REDISCOUNT- 
ABLE  FOR  ONE  BANK 

See  "Rediscount  of  Promissory  Notes,"  pages 
72-73,  above. 

INDORSEMENT  OF  MEMBER  BANKS 

See  "Rediscount  of  Promissory  Notes,"  page 
73,  above. 

REDISCOUNTS  FOR  NONMEMBER 
BANKS 

See  "Rediscount  of  Promissory  Notes,"  pages 
73-75,  above. 


90 


Rediscount   of   Six  Months' 
Agricultural  Paper 


DEFINITION 


Live  stock 
paper  included. 


Live  stock. 


Notes  of  cattle 
dealers. 


Notes  of  imple- 
ment dealers. 


Agricultural 
products  or 
implements. 


Regulations  of  Federal  Reserve  Roard 

Six  months'  agricultural  paper,  within  the  mean- 
ing of  this  regulation,  is  defined  as  a  note,  draft, 
bill  of  exchange,  or  trade  acceptance  drawn  or  is- 
sued for  agricultural  purposes,  or  based  on  live 
stock;  that  is,  a  note,  draft,  bill  of  exchange,  or 
trade  acceptance,  the  proceeds  of  which  have  been 
used,  or  are  to  be  used,  for  agricultural  purposes, 
including  the  breeding,  raising,  fattening,  or  mar- 
keting of  live  stock,  and  which  has  a  maturity  at 
the  time  of  discount  of  not  more  than  six  months, 
exclusive  of  days  of  grace. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1917,  A,  VI.) 

Opinions^and  Rulings 

The  term  "live  stock"  is  held  to  include  not  only 
beef  cattle,  but  also  horses  and  mules. 

(Informal  Ruling,  Page  72,  June,  1915,  Bulletin.) 

Notes  made  by  mule  and  cattle  dealers  are  mer- 
cantile rather  than  agricultural  paper. 

(Informal  Ruling,  Page  212,  August,  1915,  Bulletin.) 

A  note  made  by  a  dealer  in  agricultural  imple- 
ments is  not  agricultural  paper. 

(Informal  Ruling,  Page  212,  August,  1915,  Bulletin.) 

The  purchase  or  sale  of  an  agricultural  product, 
or  of  implements  or  other  commodities  used  in 
agriculture,  constitutes  a  commercial  transaction. 


Rediscounts  91 

Where  the  proceeds  of  a  note  made  by  a  merchant 
are  used  to  purchase  millet  seed  to  be  later  retailed 
or  sold,  such  a  note  can  not  be  treated  as  one  given 
for  an  agricultural  purpose  and  can  not  be  dis- 
counted by  a  Federal  reserve  bank  if  it  has  a  matur- 
ity at  time  of  discount  of  more  than  90  days. 

(Opinion  of  Counsel,  Page  526,  October,  1916,  Bulletin.) 

The  bill  or  note  of  a  packing  company,  the  pro-  Notf? or  bills  cf 

i  n        i  •    i  J    i?  5  U  Jf    V  Packing   company. 

ceeds  of  which  are  used  lor  the  purchase  ot  live 
stock  which  is  slaughtered  upon  purchase,  is  not 
"based  on  live  stock"  within  the  meaning  of  sec- 
tion 13,  and  is,  therefore,  not  eligible  for  rediscount 
if  it  has  a  maturity  in  excess  of  90  days. 

(Opinion  of  Counsel,  Page  616,  August,  1917,  Bulletin.) 

ELIGIBLE  AGRICULTURAL  PAPER 

Statutory  Provisions 

"Notes,  drafts,  and  bills  drawn  or  issued  for  ^rIcs^a^rd 
agricultural  purposes  or  based  on  live  stock  and 
having  a  maturity  not  exceeding  six  months,  ex- 
clusive of  days  of  grace,  may  be  discounted  in  an 
amount  to  be  limited  to  a  percentage  of  the  assets 
of  the  Federal  reserve  bank,  to  be  ascertained  and 
fixed  by  the  Federal  Reserve  Board." 

(Federal  Reserve  Act,  Section  IS.) 

Regulations  of  Federal  Reserve  Board 

To  be  eligible  for  rediscount  six  months'  agricul-  Conditions  of 
tural  paper,  whether  a  note,  draft,  bill  of  exchange,  el,g,bl,ty' 
or  trade  acceptance,  must  comply  with  the  respec- 
tive sections  of  this  regulation*  which  would  apply 

*  For  conditions  of  eligibility  of  promissory  notes,  see  pages 
56-61,  above.  For  conditions  of  eligibility  of  drafts  and  trade 
acceptances,  see  pages  79-83,  above. 


>2 


Commercial    Banking    Practice 


to  it  if  its  maturity  were  90  days  or  less. 

(Regulations    of    Federal    Reserve    Board,    Regulation    A, 
Series  of  1917,  A,  VI.) 

Opinions  and  Rulings 


!otes  for 
ertilizer. 


lattle  mortgages. 


Chattel  mortgages 
nnecessary. 


fetes  (or 
lairy  cattle. 


A  farmer's  six  months'  note  for  commercial  fer- 
tilizer, discounted  and  indorsed  by  a  member  bank, 
is  agricultural  paper  eligible  for  rediscount  with 
the  Federal  reserve  bank. 

(Informal  Ruling,  Page  75,  June,  1915,  Bulletin.) 

Mortgages  on  cattle  are  not  required,  and  the 
question  whether  paper  secured  by  cattle  is  self- 
hquidating  is  a  legal  one  to  be  determined  at  the 
Federal  reserve  bank. 

(Informal  Ruling,  Page  74,  June,  1915,  Bulletin.) 

The  Act  does  not  require  the  taking  of  chattel 
mortgages  as  security  for  loans  based  on  agricul- 
tural operations.  The  statement  of  the  member 
bank  to  this  effect  must  ordinarily  be  accepted. 
The  direct,  primary  purpose  of  the  loan  should  be 
for  the  ordinary  operations  of  agriculture.  Words 
"based  on"  are  not  considered  synonymous  with 
"secured  by."  Agricultural  paper  need  not  be  di- 
rectly secured  by  agricultural  products,  but  should 
be  genuinely  based  upon  transactions  entered  upon 
for  agricultural  operations.  General  banking  pru- 
dence and  knowledge  should  be  applied. 

(Informal  Ruling,  Page  72,  June,  1915,  Bulletin.) 

Notes  signed  by  a  farmer,  the  proceeds  of  which 
are  used  for  the  purchase  of  cows  to  be  used  as  dairy 
cattle,  are  eligible  for  rediscount  at  the  discretion 
of  the  Federal  reserve  bank  notwithstanding  the 
fact  that  the  cattle  are  not  primarily  purchased  for 
"breeding,  raising,  fattening,  and  marketing  of 
live  stock." 

(Informal  Ruling,  Page  112,  March,  1916,  Bulletin.) 


Rediscounts  93 

Loans  on  cattle  for  breeding,  grazing,  or  fatten-  Cattle  for^  breeding, 
ing  may  be  made  under  the  classification  of  six  fattening, 
months'  agricultural  paper  and  the  paper  may  be 
rediscounted  by  a  member  bank  at  its  Federal  re- 
serve bank. 

(Informal  Ruling,  Page  679,  December,  1916,  Bulletin.) 

Where  tractors  are  used  to  supplement  the  work  ^°rt"l^tors 
of  horses  or  mules,  or  are  used  altogether  instead  of 
these  animals,  it  is  held  that  notes  given  by  farmers 
for  the  purchase  price  of  tractors,  and  maturing 
within  six  months,  should  be  admitted  to  discount 
as  agricultural  paper. 

(Informal  Ruling,  Page  309,  April,  1918,  Bulletin.) 

Farmers'  notes,  the  proceeds  of  which  are  used  Farmers'  notes. 
for  tilling  farms  or  for  draining  land  already  in  use 
as  farm  land,  should  be  classified  as  agricultural 
paper  and  are  eligible  for  rediscount. 

(Informal  Ruling,  Page  743,  August,  1918,  Bulletin.) 

A  note  given  for  the  purchase  price  of  a  com-  Discount  by 
modity  can  be  classed  as  agricultural  paper  eligible 
for  rediscount  when  having  a  maturity  in  excess  of 
90  days,  if  the  maker  is  to  use  the  commodity  for 
an  agricultural  purpose,  regardless  of  whether  the 
note  is  discounted  by  the  maker  or  by  the  indorser. 

(Opinion  of  Counsel,  Page  312,  April,  1918,  Bulletin.) 

Where  a  farmer  makes  his  note  payable  to  the  Paper  w^J^ 
seller  of  a  commodity,  and  actually  uses  the  com- 
modity for  agricultural  purposes,  such  a  note  may 
be  treated  as  agricultural  paper,  whether  dis- 
counted with  the  member  bank  by  the  farmer  as  the 
maker  or  by  the  seller  as  the  indorser. 

Where  the  farmer  makes  his  note  payable  to  the  foa|ea^Jayeble 
member  bank  and  uses  the  proceeds  for  an  agri- 
cultural purpose,  such  a  note  may  likewise  be  dis- 
counted by  a  Federal  reserve  bank  as  agricultural 
paper.    If,  however,  in  either  of  the  foregoing  cases 


>4 


Commercial    Banking    Practice 


dentification  of 
gricultural  paper. 


the  farmer  does  not  use  or  intend  to  use  the  com- 
modity purchased  for  an  agricultural  purpose,  al- 
though it  is  capable  of  being  so  used,  the  note  in 
question  should  be  treated  as  commercial  paper  and 
not  as  agricultural  paper. 

(Informal  Ruling,  Page  310,  April,  1918,  Bulletin.) 

The  nature  of  the  bill,  the  name  of  the  acceptor, 
and  the  name  of  the  drawer  would  probably  indicate 
that  a  farmer  was  the  purchaser,  and  an  implement 
dealer,  the  seller  of  the  goods.  However,  the  pur- 
chasing member  bank  will  have  to  satisfy  itself  in 
some  satisfactory  way  that  the  bill  is  substantially 
of  an  agricultural  character.  A  simple  memoran- 
dum attached  to  the  bill,  stating  that  the  bill  was 
drawn  in  payment  of  agricultural  implements, 
signed  either  by  the  acceptor  or  the  drawer,  would 
probably  be  considered  sufficient  evidence  by  the 
member  bank  and  the  Federal  reserve  bank. 

(Informal  Ruling,  Page  68,  February,  1916,  Bulletin.) 


Discretion  of 
Federal  Reserve 
Board. 


Limit  of  agricultural 
paper  rediscountable 
by  reserve  bank. 


AMOUNT  OF  PAPER  REDISCOUNT- 
ABLE  BY  A  FEDERAL  RESERVE 
BANK 

Statutory  Provisions 

Notes,  drafts,  and  bills  drawn  or  issued  for  agri- 
cultural purposes  or  based  on  live  stock,  and  hav- 
ing a  maturity  not  exceeding  six  months,  exclusive 
of  days  of  grace,  may  be  discounted  in  an  amount 
to  be  limited  to  a  percentage  of  the  assets  of  the 
Federal  reserve  bank,  to  be  ascertained  and  fixed 
by  the  Federal  Reserve  Board. 

(Federal  Reserve  Act,  Section  13.) 

Opinions  and  Rulings 

The  law  prescribes  that  in  the  aggregate  the 
total  amount  of  agricultural  paper  purchased  by  a 
Federal  reserve  bank  should  not  exceed  a  fixed  per- 


Rediscounts  95 

centage  of  its  capital  stock,  to  be  fixed  from  time  to 
time  for  each  Federal  reserve  bank  by  the  Federal 
Reserve  Board.  The  percentage  fixed  by  the  Board 
differs  in  the  various  districts.  Whenever  a  dis- 
trict has  applied,  the  maximum  limit  has  been 
granted,  which  has  been  considered  to  be  99  per 
cent  of  the  capital  stock. 

(Informal  Ruling,  Page  68,  February,  1916,  Bulletin.) 

For  other  provisions  governing  the  rediscount  of 
agricultural  paper,  see  pages  68-75,  above. 


96 


Rediscount  of  Commodity  Paper 


DEFINITION 


Commodity 
paper   defined. 


Regulations  of  Federal  Reserve  Board 

Commodity  paper  within  the  meaning  of  this 
regulation  is  defined  as  a  note,  draft,  bill  of  ex- 
change, or  trade  acceptance  accompanied  and  se- 
cured by  shipping  documents  or  by  a  warehouse, 
terminal,  or  other  similar  receipt  covering  approved 
and  readily  marketable,  nonperishable  staples  prop- 
erly insured. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1917,  A,  VII.) 


Opinions  and  Rulings 


'Staples"   defined. 


Paper  of  mer- 
chants included. 


Potatoes 
"staple." 


"Staples"  include  manufactured  goods  as  well  as 
raw  materials,  provided  the  goods  are  nonperish- 
able and  have  a  wide  ready  market.  This  is  held 
to  include  cotton  yarns  and  flour. 

(Informal  Ruling,  Page  523,  October,  1916,  Bulletin.) 

"Commodity  paper"  includes  not  only  paper 
originating  with  the  producer,  but  also  paper  of 
merchants  and  others  when  the  commodity  is 
not  carried  for  speculative  or  purely  investment 
purposes. 

(Informal  Ruling,  Page  307,  October,  1915,  Bulletin.) 

Potatoes,  properly  graded  and  packed  and  stored 
in  a  weatherproof  and  responsible  warehouse,  as 
evidenced  by  its  receipt,  would  undoubtedly  con- 
stitute a  readily  marketable,  nonperishable  staple. 

(Informal  Ruling,  Page  614,  August,  1917,  Bulletin.) 


Rediscounts  97 

Drafts  drawn  in  connection  with  sales  to  the  Drafls  drayn  in 
United    States    Government   of   lumber   or   other  states  exchded. 
materials  do  not  conform  to  the  requirements  of 
commodity  paper  as  defined  by  the  Federal  Reserve 
Board. 

(Opinion  of  Counsel,  Page  32,  January,  1918,  Bulletin.) 

ELIGIBLE  COMMODITY  PAPER 

Statutory  Provisions 

Nothing  in  this  Act  contained  shall  be  construed  Eligibility, 
to  prohibit  notes,  drafts,  and  bills  of  exchange  se- 
cured   by    staple    agricultural    products    or   other 
goods,  wares,  or  merchandise  from  being  eligible 
for  such  discount. 

(Federal  Reserve  Act,  Section  IS.) 

Regulations  of  Federal  Reserve  Board 

To  be  eligible  for  rediscount  at  the  special  rates  Conditions  of 
authorized  to  be  established  for  commodity  paper,  e  Ig!  ! ' y' 
such  a  note,  draft,  bill  of  exchange,  or  trade  ac- 
ceptance must  also  comply  with  the  respective  sec- 
tions of  this  regulation  applicable  to  it,*  must  con- 
form to  the  requirements  of  the  Federal  reserve 
bank  relating  to  shipping  documents,  receipts, 
insurance,  etc.,  and  must  be  a  note,  draft,  bill  of 
exchange,  or  trade  acceptance  on  which  the  rate 
of  interest  or  discount — including  commission — 
charged  the  maker,  does  not  exceed  six  per  cent 
per  annum. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1917,  A,  VII.) 

*  For  conditions  of  eligibility  of  promissory  notes,  see  pages 
56-61,  above.  For  conditions  of  eligibility  of  drafts  and  trade 
acceptances,  see  pages  79-83,  above. 


98 


Commercial    Banking    Practice 


Direct  discounts 
not  allowed. 


Drafts  drawn  in 
sales  to  United 
States   ineligible. 


Opinions  and  Hillings 

Federal  reserve  banks  can  not  discount  commod- 
ity paper  directly  for  mercantile  firms. 

(Informal  Ruling,  Page  112,  March,  1916,  Bulletin.) 

Drafts  drawn  in  connection  with  sales  to  the 
United  States  Government  of  lumber  or  other  ma- 
terials can  not  be  treated  as  bills  of  exchange  drawn 
against  actually  existing  value  and  are  subject  to 
the  limitations  of  section  5200,  Revised  Statutes, 
when  discounted  by  national  banks.  Such  drafts 
do  not  conform  to  the  requirements  of  commodity 
paper  as  defined  by  the  Federal  Reserve  Board 
and  should  not  be  discounted  at  the  rate  prescribed 
for  such  paper. 

(Opinion  of  Counsel,  Page  32,  January,  1918,  Bulletin.) 


SUSPENSION  OF  SPECIAL  RATE  ON 
COMMODITY  PAPER 


Rate  for  move- 
ment of  crops. 


Regulations  of  Federal  Reserve  Roard 

As  the  special  rate  on  commodity  paper  is  in- 
tended to  assist  actual  producers  during  crop-mov- 
ing periods  and  is  not  designed  to  benefit  specula- 
tors, the  Board  reserves  the  right  to  suspend  the 
special  rates  herein  provided  whenever  it  is  ap- 
parent that  the  movement  of  crops,  which  this  rate 
is  intended  to  facilitate,  has  been  practically  com- 
pleted. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1917,  A,  VII.) 


99 


Rediscount  of  Bank  Acceptances 

DEFINITION 

Regulations  of  Federal  Reserve  Board 

A  banker's  acceptance  within  the  meaning  of  ^cacneketranCe 
this  regulation  is  defined  as  a  draft  or  bill  of  ex- 
change of  which  the  acceptor  is  a  bank  or  trust 
company,  or  a  firm,  person,  company,  or  corpora- 
tion engaged  in  the  business  of  granting  bankers' 
acceptance  credits. 

(Regulations    of    Federal    Reserve    Board,    Regulation    A, 
Series  of  1917,  B.) 

Opinions  and^ Rulings 

The  question  of  determining  the  eligibility  of  an  Eligible 
acceptor  under  the  regulation  is  left  to  the  discre-  accep  01 
tion  of  Federal  reserve  banks  themselves.  It  is,  of 
course,  understood  that  the  Board  would  not  wish 
to  see  concerns  regarded  as  eligible  acceptors  which 
are  not  in  the  habit  of  carrying  on  some  acceptance 
business  regularly  and  are  not  generally  of  such 
character  and  standing  as  to  qualify  their  accept- 
ance as  a  "banker's  acceptance." 

(Informal  Ruling,  Page  362,  November,  1915,  Bulletin.) 

A  bill  of  exchange,  in  order  to  be  negotiable,  Conditions  of 


must  be  an  unconditional  order  to  pay,  on  demand 
or  at  a  fixed  or  determinable  future  time,  a  certain 
sum  of  money  to  order  or  to  bearer.  If  payment  is 
dependent  upon  the  happening  of  a  certain  con- 
tingency, the  bill  is  conditional  and  nonnegotiable. 
If  payment  is  confined  to  the  proceeds  of  a  particu- 
lar fund  and  is  not  chargeable  to  the  general  credit 


negotiability. 


Conditional  bill. 


100 


Commercial    Banking    Practice 


Conditional 
acceptance. 


of  the   drawer,  the   bill   is   conditional   and   non- 
negotiable. 

A  general  acceptance  of  a  conditional  bill  or 
a  conditional  acceptance  of  an  unconditional  bill 
makes  the  acceptance  a  conditional  one  and  de- 
stroys its  negotiability. 

(Opinion  of  Counsel,  Page  21,  May,  1915,  Bulletin.) 


Conditions  of 
eligibility. 


ELIGIBLE  BANK  ACCEPTANCES 

Statutory  Provisions 

"Any  Federal  reserve  bank  may  discount  accept- 
ances of  the  kinds  hereinafter  described,  which  have 
a  maturity  at  the  time  of  discount  of  not  more  than 
three  months'  sight,  exclusive  of  days  of  grace,  and 
which  are  indorsed  by  at  least  o?ie  member  bank." 

(Federal  Reserve  Act,  Section  13.) 


Maturity. 


Indorsement. 


Based   on  imports 
and  exports. 

Based  on  domestic 
shipments. 


Secured  by 
documents. 


Drawn  to  furnish 
dollar   exchange. 


Regulations  of  Federal  Reserve  Board 

Any  Federal  reserve  bank  may  discount  for  any 
of  its  member  banks  bankers'  acceptances  which 
have  a  maturity  at  the  time  of  discount  of  not  more 
than  three  months'  sight,  exclusive  of  days  of  grace, 
which  are  indorsed  by  at  least  one  member  bank, 
and  which  grow  out  of  transactions  involving  the 
importation  or  exportation  of  goods ;  or  which  grow 
out  of  transactions  involving  the  domestic  shipment 
of  goods,  provided  shipping  documents  are  attached 
at  the  time  of  acceptance;  or  which  are  secured  at 
the  time  of  acceptance  by  a  warehouse  receipt  or 
other  such  document  conveying  or  securing  title 
covering  readily  marketable  staples.  Any  Federal 
reserve  bank  may  also  acquire  drafts  or  bills  of  ex- 
change drawn  on  member  banks  by  banks  or  bank- 
ers in  foreign  countries  or  dependencies  or  insular 
possessions  of  the  United  States  for  the  purpose  of 
furnishing  dollar  exchange. 


Rediscounts  101 

To  be  eligible  for  rediscount  the  bill  must  have 
been  drawn  under  a  credit  opened  for  the  purpose 
of  conducting,  or  settling  accounts  resulting  from, 
a  transaction  or  transactions  involving: 

( 1 )  The  shipment  of  goods  between  the  United  Base.d  on  exports 
States  and  any  foreign  country,  or  between  the  andunports- 
United  States  and  any  of  its  dependencies  or  insu- 
lar possessions,  or  between  foreign  countries ;  or 

(2)  The    domestic    shipment    of    goods,  pro-  Based  on  domestic 
vided  shipping  documents  are  attached  at  the  time  8  Ipments' 

of  acceptance ;  or 

(3)  It  must  be  a  bill  which  is  secured  at  the  Based  on  ware- 
time  of  acceptance  by  a  warehouse  receipt  or  other    ouse  recelpts< 
such  document  conveying  or  securing  title  covering 

readily  marketable  staples. 

(4)  Any  Federal  reserve  bank  may  also  ac-  JJr/jwn  t0  {"rnish 
quire  drafts  or  bills  drawn  by  a  bank  or  banker  in    °  ar  exc  ange' 
a  foreign  country  or  dependency  or  insular  posses- 
sion of  the  United  States  for  the  purpose  of  furnish- 
ing dollar  exchange  and  accepted  by  a  member 

bank.  Such  drafts  or  bills  may  be  acquired  prior 
to  acceptance  provided  they  have  the  indorsement 
of  a  member  bank. 

(Regulations    of    Federal    Reserve    Board,    Regulation    A, 
Series  of  1917,  B.) 

Opinions  and  Rulings 

There  is  some  doubt  in  the  courts  whether  the  ,R'Kren,ce  to  fact 

„  .  •       l  •  j       o  j       bill  is  based 

mere  reference  to  a  particular  consignment  ol  goods  on  imports  or 
makes  the  bill  conditional,  some  courts  stating  that  «p°rt»- 
it  is  merely  an  indication  of  the  fund  out  of  which 
the  drawee  is  to  reimburse  himself;  other  courts 
holding  that  it  makes  the  bill  conditional  because 
limiting  payment  to  the  proceeds  of  the  particular 
shipment  referred  to.  There  is  no  doubt,  however, 
that  a  reference,  in  general  terms,  on  the  face  of  an 
accepted  bill  to  the  fact  that  it  is  based  on  the  ex- 


102 


Commercial    Banking    Practice 


Acceptances 
indorsed  by  member 
bank  of  another 
district. 


Discount  of 
acceptances  not 
paid  at  Federal 
reserve  bank. 


portation  or  importation  of  goods  would  not  make 
it  conditional  and  nonnegotiable,  and  it  would  not, 
therefore,  be  ineligible  for  discount  under  the  pro- 
visions of  section  13  of  the  Federal  Reserve  Act. 

(Opinion  of  Counsel,  Page  21,  May,  1915,  Bulletin.) 

Federal  reserve  banks  may,  under  the  provisions 
of  section  13,  discount  acceptances  based  on  the  im- 
portation or  exportation  of  goods,  provided  they 
have  a  maturity  at  time  of  discount  of  not  more 
than  three  months,  and  provided,  further,  that  they 
are  indorsed  by  at  least  one  member  bank.  It  is  im- 
material whether  this  member  bank  is  located  in  the 
district  of  the  Federal  reserve  bank  which  is  mak- 
ing the  discount  or  in  any  other  district,  the  term 
"member  bank"  being  broad  enough  to  include 
member  banks  wherever  located. 

(Opinion  of  Counsel,  Page  98,  June,  1915,  Bulletin.) 

The  discount  committee  of  the  Federal  Reserve 
Board  has  reported  that,  in  its  opinion,  "Federal 
reserve  banks  should  insist  that  acceptances  when 
due  should  be  paid  by  checks  on  the  local  Federal 
reserve  bank,  in  order  that  they  may  be  charged  to 
the  account  of  the  acceptor  on  the  day  of  maturity, 
or  else  that  acceptances  should  be  paid  by  checks 
through  the  clearings.  If  an  arrangement  on  these 
lines  can  not  be  perfected,  Federal  reserve  banks 
ought  to  be  required  to  add  one  day  to  the  actual 
number  of  days  the  acceptance  has  to  run  when 
bought,  so  as  to  make  up  for  the  loss  of  interest 
incurred  in  collecting  in  this  manner." 

This  report  has  been  agreed  to  by  the  Board,  and 
your  bank  is  requested,  in  buying  acceptances,  to 
charge  discount  for  one  additional  day,  except  in 
cases  where  satisfactory  arrangements  are  made  to 
make  actual  cash  payment  at  the  Federal  reserve 
bank  on  the  day  of  maturity. 

(Informal  Ruling,  Page  521,  June,  1918,  Bulletin.) 


Rediscounts  103 

Acceptances  of  an  acceptance  corporation  ought  ^cpeerco°rf  JJJJjJJj 
to  be  dealt  with  exactly  as  would  be  the  acceptances 
of  a  prime  private  banker.  These  acceptance  cor- 
porations are  in  the  same  relation  to  the  Federal 
Reserve  System  as  the  private  bankers.  They  can 
not  become  members,  but,  inasmuch  as  they  expect 
to  give  full  information  about  their  own  financial 
standing  and  the  nature  of  their  acceptances,  and 
as  they  exercise  a  most  important  function  for  the 
further  development  of  our  acceptance  business  and 
discount  market,  their  operation  ought  to  be  en- 
couraged in  every  respect. 

(Informal  Ruling,  Page  634,  July,  1918,  Bulletin.) 

In  purchasing  or  discounting  bankers'  accept-  ^tf^Z*** 
ances  or  other  bills  which  are  secured  by  warehouse  warehouses, 
receipts,   etc.,   the  Federal  reserve   banks   should 
make  sure  that  the  receipt  is  issued  by  a  warehouse 
which  is  independent  of  the  borrower. 

(Informal  Ruling,  Page  30,  January,  1917,  Bulletin.) 

Gold  coin  is  "goods"  within  the  meaning  of  sec-  Gold  coin  a.  "good," 
tion  13  of  the  Federal  Reserve  Act. 

(Informal  Ruling,  Page  29,  January,  1917,  Bulletin.) 

Gold    bars    may    be    properly    considered    as  Gold  bunion 
"goods." 

(Informal  Ruling,  Page  29,  January,  1917,  Bulletin.) 

While  a  very  decided  differential  may  be  inadvis-  £f  JJto  bank 
able,  there  is  no  objection  to  a  moderate  differential,  acceptances, 
say  J4  of  1  per  cent,  to  apply  between  member- 
bank  acceptances  and  the  acceptances  of  large  non- 
member  institutions  well  known  throughout  the 
country  and  whose  acceptances  necessarily  have  a 
broad  market. 

(Informal  Ruling,  Page  28,  January,  1917,  Bulletin.) 

For  additional  opinions  and  rulings  bearing  on 
this  subject,  see  Parti,  "Bank  Acceptances,"  pages 
16-21,  29-31,  33-35,  38-42,  above. 


104 


Commercial    Banking    Practice 


INELIGIBLE  BANK  ACCEPTANCES 


battel  mortgages. 


Bills  payable 
outside  United 
States. 


Opinions  and  Rulings 

The  Board,  having  reached  the  conclusion  that 
national  banks  are  not  authorized  to  accept  bills 
secured  by  chattel  mortgages  on  cattle,  deems  it 
advisable  that  Federal  reserve  banks  should  con- 
sider as  ineligible  bills  drawn  against  the  security 
of  such  chattel  mortgages,  whether  accepted  by 
member  or  nonmember  banks. 

(Informal  Ruling,  Page  309,  April,  1918,  Bulletin.) 

Under  the  regulations  of  the  Federal  Reserve 
Board  defining  bankers'  acceptances,  any  bill  which 
is  payable  elsewhere  than  in  the  United  States 
would  not  be  eligible  for  purchase  as  a  bankers'  ac- 
ceptance, under  the  provisions  of  Regulations  A 
and  B,  Series  of  1917,  even  though  eligible  in  all 
other  respects. 

The  acceptance,  however,  might  properly  be  pur- 
chased as  a  bill  of  exchange  payable  in  a  foreign 
country. 

""(Informal  Ruling,  Page  520,  June,  1918,  Bulletin.) 

For  additional  opinions  and  rulings  bearing  on 
this  subject,  see  Part  I,  "Bank  Acceptances,"  pages 
16-21,  29-31,  33-35,  38-42,  above. 


EVIDENCE  OF  ELIGIBILITY 


Evidence  fur- 
Dished  Federal 
reserve  bank. 


Regulations  of  Federal  Reserve  Board 

A  Federal  reserve  bank  must  be  satisfied,  either 
by  reference  to  the  acceptance  itself  or  otherwise, 
that  it  is  eligible  for  rediscount.  Satisfactory  evi- 
dence of  eligibility  may  consist  of  a  stamp  or  cer- 
tificate affixed  by  the  acceptor  in  form  satisfactory 
to  the  Federal  reserve  bank. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1917,  B.) 


Rediscounts 


105 


Opinions  and  Rulings 

The  Federal  reserve  bank  reserves  the  right  to  J^J^ 
ask  State  member  banks  for  evidence  underlying 
the  certification  given  to  it,  and  the  bank  examiner 
may  require  evidence  from  the  national  bank. 
Member  banks  would,  therefore,  best  protect  them- 
selves by  stipulating  for  themselves  the  right  at 
times  to  ask  for  substantiation  of  the  assurances 
given  by  their  customers. 

(Informal  Ruling,  Page  406,  December,  1915,  Bulletin.) 

MATURITY 

Statutory   Provisions 

"Any  Federal  reserve  bank  may  discount  accept-  Three  months, 
ances  .  .  .  which  have  a  maturity  at  the  time  of  dis- 
count of  not  more  than  three  months'  sight,  ex- 
clusive of  days  of  grace." 

(Federal  Reserve  Act,  Section  IS.) 

Regulations  of  Federal  Reserve  Board 

Federal  reserve  banks  may  discount  for  their 
member  banks  "bankers'  acceptances  which  have  a 
maturity  at  the  time  of  discount  of  not  more  than 
three  months'  sight,   exclusive  of  days  of  grace. 

(Regulations  of  Federal  Reserve  Board,  Regulation  A, 
Series  of  1917,  B.) 

Opinions  and  Rulings 

Acceptance  business  of  Federal  reserve  banks  is 
not  restricted  "to  the  original  transactions  only,"  if 
the  transaction  has  not  been  liquidated.  When  the 
first  acceptance  matures,  member  bank  may  renew 
the  acceptance,  and  there  is  no  reason  why  a  Fed- 
eral reserve  bank  may  not  discount  such  renewed 
acceptance,  although  a  Federal  reserve  bank  must 
not  engage  in  advance  to  make  such  discount  of  a 
renewal. 

(Informal  Ruling,  Page  126,  July,  1915,  Bulletin.) 


Renewals. 


106 


Commercial    Banking    Practice 


INDORSEMENT 


Member  bank 
indorsement. 


Statutory  Provisions 

Any  Federal  reserve  bank  may  discount  accept- 
ances .  .  .  which  are  indorsed  by  at  least  one  mem- 
ber bank. 

(Federal  Reserve  Act,  Section  13.) 


Indorsement 
in  blank. 


Opinions  and  Rulings 

If  the  acceptance  is  indorsed  in  blank  it  can  of 
course  change  ownership  from  one  holder  to  an- 
other without  being  indorsed  by  each  subsequent 
holder,  and  the  title  would  pass. 

The  Board  expresses  the  hope  that  we  may  soon 
reach  the  point  when  Federal  reserve  banks  can 
make  a  definite  rule  not  to  buy  bankers'  acceptances 
except  such  as  bear  three  responsible  signatures, 
being  those  of  the  acceptor,  the  drawer,  and  the 
indorser. 

(Informal  Ruling,  Page  744,  August,  1918,  Bulletin.) 


PART    III. 


Advances  by  Federal 
Reserve  Banks 

on  the 

Promissory   Notes  of 
Member  Banks 


109 


PART  III. 

Advances  by 
Federal    Reserve    Banks 

General  Statutory  Provisions 

"Any  Federal  reserve  bank  may  make  advances  Maturity, 
to  its  member  banks  on  their  promissory  notes  for 
a  period  not  exceeding  fifteen  days  at  rates  to  be 
established  by  such  Federal  reserve  banks,  subject 
to  the  review  and  determination  of  the  Federal  Re- 
serve Board,  provided  such  promissory  notes  are  Security: 
secured  by  such  notes,  drafts,  bills  of  exchange,  or 
bankers'  acceptances  as  are  eligible  for  rediscount  Eligible  paper; 
or  for  purchase  by  Federal  reserve  banks  under  the 
provisions  of  this  Act,  or  by  the  deposit  or  pledge  United  states 
of  bonds  or  notes  of  the  United  States."  obligation.; 

(Federal  Reserve  Act,  Section  13.) 

"The  Federal  reserve  banks  shall  be  authorized,  War  Finance 
subject  to  the  maturity  limitations  of  the  Federal  Corpora,  bond,. 
Reserve  Act  and  to  regulations  of  the  Federal  Re- 
serve Board,  to  discount  the  direct  obligations  of 
member  banks  secured  by  .   .   .  bonds  of  the  [War 
Finance]  Corporation." 

(War  Finance  Corporation  Act,  Section  13.) 

SECURITY 

Announcements  of^Federal  Reserve  Board 

Advances  may  be  made  to  member  banks  on  their  Jj^JJjEE* 
promissory  notes,   secured   either  by   such   notes,  obligations, 
drafts,  bills  of  exchange,  or  bankers'  acceptances 


110 


Commercial    Banking    Practice 


Indorsement   of 
collateral. 


Collateral  of 
Government  bonds. 


County   warrants 
ineligible. 


Farm  loan 
bonds  ineligible. 


as  are  eligible  for  rediscount  or  purchase  by  Federal 
reserve  banks,  or  by  the  deposit  or  pledge  of  bonds 
or  notes  of  the  United  States. 

(Announcement  of  Federal  Reserve  Board,  Page  513,  Octo- 
ber, 1916,  Bulletin.) 

Opinions  and  Rulings 

Eligible  paper  pledged  as  security  for  a  promis- 
sory note  of  a  member  bank  on  which  an  advance  is 
being  made  by  a  Federal  reserve  bank  need  not  be 
indorsed  by  such  member  bank  if  such  eligible  paper 
is  already  in  negotiable  form. 

(Opinion  of  Counsel,  Page  685,  December,  1916,  Bulletin.) 

Any  member  bank  which  has  itself  purchased  ob- 
ligations of  the  United  States  may  procure  ad- 
vances from  its  Federal  reserve  bank,  for  not  ex- 
ceeding 15  days,  on  its  own  promissory  note,  pro- 
vided such  note  is  secured  by  a  deposit  or  pledge  of 
bonds  or  notes  of  the  United  States. 

(Informal  Ruling,  Page  159,  March,  1917,  Bulletin.) 

Member  banks  in  procuring  advances  from  Fed- 
eral reserve  banks  on  promissory  notes  must  secure 
such  notes  by  paper  eligible  for  rediscount  or  for 
purchase  by  Federal  reserve  banks  or  by  bonds  or 
notes  of  the  United  States.  County  warrants  are 
not  eligible  as  security. 

(Opinion  of  Counsel,  Page  609,  November,  1916,  Bulletin.) 

Farm  loan  bonds  are  issued  by  Federal  farm  land 
banks  incorporated  under  Federal  law,  and  are  not 
obligations  of  the  United  States,  so  that  they  are 
not  eligible  as  collateral  for  promissory  notes  of 
member  banks. 

(Opinion  of  Counsel,  Page  33,  January,  1918,  Bulletin.) 

For  conditions  of  eligibility  of  notes,  drafts,  and 
acceptances,  see  pages  56-61,  79-83,  91-94,  97-98, 
100-103,  above. 


Advances   by    Reserve    Banks  111 

MATURITY 

Statutory  Provisions 

Any  Federal  reserve  bank  may  make  advances  to  Fifteen  days, 
its  member  banks  on  their  promissory  notes  for 
periods  not  exceeding  fifteen  days. 

(Federal  Reserve  Act,  Section  13.) 

Opinions  and  Rulings 

If  by  reason  of  a  State  law  paper  falling  due  on  Notes  due  on  Sunday 
Saturday  or  Sunday  must  be  collected  one  or  two  or  ega    ° !  a7' 
days  before  its  apparent  maturity  or  one  or  two 
days   thereafter,   interest   should    be   charged   ac- 
cordingly. 

(Informal  Ruling,  Page  108,  February,  1918,  Bulletin.) 

A  Federal  reserve  bank  may  properly  renew  the  Renewals 
15-day  notes  of  its  member  banks  if  properly  se-  permitte  ■ 
cured,  provided  that  the  Federal  reserve  bank  does 
not  obligate  itself  in  advance  to  make  any  such 
renewal. 

(Opinion  of  Counsel,  Page  765,  October,  1917,  Bulletin.) 

While  the  Federal  Reserve  Board  does  not  wish  ^"^J01 
to  prohibit  the  renewal  of  15-day  notes,  it  feels  that 
renewals  should  be  the  exception  rather  than  the 
rule. 

(Informal  Ruling,  Page  879,  November,  1917,  Bulletin.) 


II 


PART    IV. 


£ 


eJ*1 


a# 


Open     Market 
Transactions 


ut 


PART    IV. 

Open  Market  Transactions 

General  Statutory  Provisions 

"Any  Federal  reserve  bank  may,  under  rules  and  Cable  transfers, 
regulations  prescribed  by  the  Federal  Reserve  and  bills. 
Board,  purchase  and  sell  in  the  open  market,  at 
home  or  abroad,  either  from  or  to  domestic  or  for- 
eign banks,  firms,  corporations,  or  individuals, 
cable  transfers  and  bankers'  acceptances  and  bills 
of  exchange  of  the  kinds  and  maturities  by  this 
Act  made  eligible  for  rediscount,  with  or  without 
the  indorsement  of  a  member  bank. 

"Every  Federal  reserve  bank  shall  have  power  Commercial  bills. 
...  to  purchase  from  member  banks  and  to  sell, 
with  or  without  its  indorsement,  bills  of  exchange 
arising  out  of  commercial  transactions,  as  herein- 
before denned.    .    . 

(Federal  Reserve  Act,  Section  14.) 

General  Regulations  and  Rulings 

Regulations  of  Federal  Reserve  Roard 


Conditions 
governing 


The  Federal  Reserve  Board,  exercising  its  statu- 
tory right  to  regulate  the  purchase  of  bills  of  ex-  eiigibfiity. 
change  and  acceptances,  has  determined  that  a  bill 
of  exchange  or  acceptance,  to  be  eligible  for  pur- 
chase by  Federal  reserve  banks  under  section  14: 

(a)      Must  not  have  been  issued  for  carrying  or  Security  paper, 
trading  in  stocks,  bonds,  or  other  investment  secur- 
ities, except  bonds  and  notes  of  the  Government  of 
the  United  States; 


Commercial    Banking    Practice 


ixed,  speculative,  or 
ivestment   paper. 


cceptance  required. 


ecured  bills. 


ther 
equirements. 


(b)  Must  not  be  a  bill  the  proceeds  of  which 
have  been  used  or  are  to  be  used  for  permanent  or 
fixed  investments  of  any  kind,  such  as  land,  build- 
ings, or  machinery,  or  for  investments  of  a  merely 
speculative  character; 

(c)  Must  have  been  accepted  by  the  drawee 
prior  to  purchase  by  a  Federal  reserve  bank  unless 
it  is  accompanied  and  secured  by  shipping  docu- 
ments or  by  a  warehouse,  terminal,  or  other  similar 
receipt  conveying  or  securing  title; 

(d)  May  be  secured  by  the  pledge  of  goods* 
or  collateral,  provided  it  is  otherwise  eligible. 

In  addition  to  the  above  general  requirements, 
each  bill  of  exchange  and  trade  acceptance  pur- 
chased under  the  terms  of  this  regulation  must  also 
conform  to  the  more  specific  requirements  set  forth 
under  Regulation  B,  III  (see  page  124),  and 
each  bankers'  acceptance  must  also  conform  to  the 
more  specific  requirements  set  forth  under  Regu- 
lation B,  IV  (see  pages  118-119) . 

(Regulations  of  Federal  Reserve  Board,  Regulation  B, 
Series  of  1917,  II.) 


Opinions  and  Rulings 


'romissory  notes 
xcluded. 


The  original  bill  for  the  establishment  of  Federal 
reserve  banks  permitted  the  purchase  in  the  open 
market  of  "notes,  drafts,  and  bills  of  exchange," 
but  in  the  bill  as  finally  enacted  the  words  "notes 
and  drafts"  were  stricken  out  in  section  14,  although 
they  are  retained  in  section  13.  The  Board  has 
reached  the  conclusion,  in  which  it  is  sustained  by 
opinion  of  counsel,  that  Congress  drew  a  distinction 
in  sections  13  and  14  between  the  several  forms  of 


*  When  used  in  this  regulation  the  word  "goods"  shall  be 
construed  to  include  goods,  wares,  merchandise,  or  agricultural 
products,  including  live  stock. 


Open     Market     Transactions  117 

commercial  paper,  and  that  promissory  notes,  even 
though  bearing  an  additional  indorsement,  must  be 
regarded  as  excluded  from  open  market  purchases 
under  section  14. 

There  remain,  then,  as  eligible  for  purchase  under  Eligible  paper, 
this  section,  "cable  transfers"  and  "bills  of  ex- 
change" of  two  kinds:  (1)  So-called  foreign  bills  of 
exchange;  and  (2)  domestic  acceptances  drawn  by 
one  party  on  another,  as  by  a  seller  of  goods  upon 
the  purchaser,  such  as  have  been  classified  by  the 
Board  as  trade  acceptances  either  accepted  or  not 
accepted  at  the  time  of  purchase. 

The  decision  whether  Federal  reserve  banks 
should  engage  in  such  open  market  operations  rests 
entirely  with  them  and  not  with  the  Federal  Re- 
serve Board. 

Banks  are  cautioned  that  no  bill  be  bought  in  the 
open  market  which,  even  if  indorsed  by  a  member 
bank,  would  be  ineligible  for  rediscount  under  sec- 
tion 13. 

(Informal  Ruling,  Page  360,  November,  1915,  Bulletin.) 

Any  Federal  reserve  bank  may,  under  the  pro-  Promissory  notes, 
visions  of  section  14  of  the  Federal  Reserve  Act, 
purchase  acceptances  and  bills  of  exchange  of  cer- 
tain kinds  and  maturities  in  the  open  market;  but 
promissory  notes  as  distinguished  from  bills  of  ex- 
change, whether  one  or  more  names,  are  not  eligible 
for  such  purchase. 

(Opinion  of  Counsel,  Page  365,  November,  1915,  Bulletin.) 

The  purchase  of  commodity  loans  from  member  Commodity  paper, 
banks  without  their  indorsement  would  not  come 
within  the  provisions  of  the  law  unless  there  is  two- 
name    commodity   paper   or    such   paper    can  be 
created  in  connection  with  commodity  loans. 

(Informal  Rubng,  Page  4?06,  December,  1915,  Bulletin.) 


118 


Transactions  in  Bank 
Acceptances 


Banker's 
acceptance. 


DEFINITION 

Regulations  of  Federal  Reserve  Board 

A  banker's  acceptance,  within  the  meaning  of  this 
regulation,  is  a  bill  of  exchange  of  which  the  ac- 
ceptor is  a  bank  or  trust  company,  or  a  firm,  person, 
company,  or  corporation  engaged  in  the  business 
of  granting  bankers'  acceptance  credits. 

(Regulations  of  Federal  Reserve  Board,  Regulation  B, 
Series  of  1917,  IV.) 


ELIGIBLE  BANK  ACCEPTANCES 


Cable  transfers 
and  bankers' 
acceptances. 


Based   on  imports 
and  exports. 


Statutory  Provisions 

Any  Federal  reserve  bank  may  .  .  .  purchase 
and  sell  .  .  .  cable  transfers  and  bankers'  accept- 
ances ...  of  the  kinds  and  maturities  by  this  Act 
made  eligible  for  rediscount,  with  or  without  the  in- 
dorsement of  a  member  bank. 

(Federal  Reserve  Act,  Section  14.) 

Regulations  of  Federal  Reserve  Board 

To  be  eligible  for  purchase,  the  bill  .  .  .  must 
have  been  drawn  under  a  credit  opened  for  the 
purpose  of  conducting  or  settling  accounts  resulting 
from  a  transaction  or  transactions  involving: 

(1)  The  shipment  of  goods  between  the  United 
States  and  any  foreign  country,  or  between  the 


Open     Market     Transactions  119 

United  States  and  any  of  its  dependencies  or  in- 
sular possessions,  or  between  foreign  countries ; 

(2)  The  shipment  of  goods  within  the  United  f,wdl.0B  . . 

o.i  •-i-ii        i  •■m  i  •  a    •  domestic  shipments. 

Mates,  provided  the  bill  at  the  time  ot  its  accept- 
ance is  accompanied  bv  shipping  documents; 

(3)  The  storage  within  the   United   States   of  ^™"0d„Jyrecei  ta. 
readily  marketable  goods,  provided  the  acceptor  of 

the  bill  is  secured  by  warehouse,  terminal,  or  other 
similar  receipt; 

(4)  The  storage  within  the  United   States  of  *Mgeodo£  J^fe 
goods  which  have  been  actually  sold,  provided  the 
acceptor  of  the  bill  is  secured  by  the  pledge  of  such 

goods;  i      ; 

(5)  Or  it  must  be  a  bill  drawn  by  a  bank  or  Drawn  to  furnish 

,       v,  '  p  ,  t  i  •  dollar  exchange. 

banker  m  a  toreign  country  or  dependency  or  in- 
sular possession  of  the  United  States  for  the  pur- 
pose of  furnishing  dollar  exchange.  In  this  latter 
case  the  bank  or  banker  drawing  the  bill  must  be 
in  a  country,  dependency,  or  possession  whose  us- 
ages of  trade  have  been  determined  by  the  Federal 
Reserve  Board  to  require  the  drawing  of  bills  of 
this  character. 

(Regulations    of    Federal    Reserve    Board,    Regulation    B, 
Series  of  1917,  IV.) 

Opinions  and  Rulings 

Gold  bars  may  be  properly  considered  as  goods,  BuIlion  s^pments. 
and   accordingly   60-day  bills   when   accepted   by 
banks  and  bankers  against  such  shipment  would  be 
eligible  for  purchase  by  Federal  reserve  banks  as 
based  upon  or  involving  the  exportation  of  goods. 

(Informal  Ruling,  Page  29,  January,  1917,  Bulletin.) 

Gold  coin  is  "goods"  within  the  meaning  of  sec-  Coin  shiPments- 
tion  13  of  the  Federal  Reserve  Act;  and,  therefore, 
a  bill  of  exchange  drawn  to  finance  a  shipment  of 
gold  coin  from  this  country  is  eligible  for  purchase 
by  a  Federal  reserve  bank  if  otherwise  in  conform- 


20 


Commercial    Banking    Practice 


ity  with  the  provisions  of  the  law  and  the  regula- 
tions of  the  Federal  Reserve  Board. 

(Informal  Ruling,  Page  29,  January,  1917,  Bulletin.) 

For  additional  rulings,  see,  under  Part  II,  "Rediscounts  with 
Federal  Reserve  Bank,"  pages  100-103,  above. 

INELIGIBLE  BANK  ACCEPTANCES 


:ceptances    not 
sed  on  sales 
d  not  secured. 


:ceptances 
cured  by 
II  of  sale. 


lis  payable  out- 
le   United   States. 


Opinions  and  Rulings 

Acceptances  drawn  by  a  manufacturer  on  and 
accepted  by  a  trust  company  not  a  member  of  the 
Federal  Reserve  System,  the  proceeds  of  which  are 
to  be  used  for  purchases  of  raw  material  and  pay- 
ment for  labor  where  the  goods  had  not  been  sold 
and  no  warehouse  receipts  or  other  instruments 
could  be  furnished,  are  held  not  to  be  eligible  for 
purchase  by  a  Federal  reserve  bank. 

(Informal  Ruling,  Page  65,  February,  1916,  Bulletin.) 

A  banker's  acceptance  drawn  for  the  purpose  of 
purchasing  goods  secured  by  a  bill  of  sale  of  stock 
in  hand  is  not  eligible  for  purchase  by  Federal  re- 
serve banks. 

(Opinion  of  Counsel,  Page  684,  December,  1916,  Bulletin.) 

Under  the  regulations  of  the  Federal  Reserve 
Board  defining  bankers'  acceptances,  any  bill  which 
is  payable  elsewhere  than  in  the  United  States 
would  not  be  eligible  for  purchase  as  a  bankers' 
acceptance,  under  the  provisions  of  Regulations 
A  and  B,  Series  of  1917,  even  though  eligible  in  all 
other  respects. 

The  acceptance,  however,  might  properly  be  pur- 
chased as  a  bill  of  exchange  payable  in  a  foreign 
country. 

(Informal  Ruling,  Page_520,_June,_1918,  Bulletin. )_^ 

For  additional  rulings,  see,  under  Part  II,  "Rediscounts  with 
Federal  Reserve  Bank,"  page  104,  above. 


Open     Market     Transactions  121 

EVIDENCE   OF  ELIGIBILITY  AND  RE- 
QUIREMENT OF  STATEMENTS 

Regulations  of  Federal  Reserve  Board 

A  Federal  reserve  bank  must  be  satisfied  either  Evidence  of 
by  reference  to  the  acceptance  itself,  or  otherwise,  el,sib,llty- 
that  it  is  eligible  for  purchase.     Satisfactory  evi- 
dence of  eligibility  may  consist  of  a  stamp  or  cer- 
tificate affixed  by  the  acceptor,  in  form  satisfactory 
to  the  Federal  reserve  bank.    No  evidence  of  eligi-  Exception  of 
bility  is  required  with  respect  to  a  bill  accepted  by  ^^FbiA*7 
a  national  bank. 

Bankers'  acceptances,  other  than  those  accepted  statements. 
or  indorsed  by  member  banks,  shall  be  eligible  for 
purchase  only  after  the  acceptor  has  furnished  a 
satisfactory  statement  of  financial  condition  in  form 
to  be  approved  by  the  Federal  Reserve  Board  and 
has  agreed  in  writing  with  a  Federal  reserve  bank 
to  inform  it  upon  request  concerning  the  transac- 
tions underlying  such  acceptances. 

(Regulations    of    Federal    Reserve    Board,    Regulation    B, 
Series  of  1917,  IV.) 

Opinions  and  Rulings 

Ultimate    responsibility   in   purchasing   accept-  Responsibility 
ances  is  held  to  rest  with  Federal  reserve  banks.      for  eli*ibil,ty- 

The   announcement  that   the   Federal   Reserve 
Board  will  require  statements  satisfactory  to  it  in  statement  form, 
connection  with  acceptances  is  held  to  mean  that 
the  statement  shall  be  satisfactory  in  form. 

(Informal  Ruling,  Page  13,  January,  1916,  Bulletin.) 

MATURITY 

Statutory  Provisions 

Any  Federal  reserve  bank  may     .     .     .     pur- 
chase and  sell     .     .     .     cable  transfers  and  bank- 


]22  Commercial    Banking    Practice 

er's  acceptances     ...     of  the  kinds  and  maturi- 
ties by  this  Act  made  eligible  for  rediscount. 

(Federal  Reserve  Act,  Section  14.) 

Regulations  of  Federal  Reserve  Board 

To  be  eligible  for  purchase,  the  bill  must  have  a 
maturity  at  time  of  purchase  of  not  more  than  three 
months,  exclusive  of  days  of  grace. 

(Regulations  of  P'ederal  Reserve  Board,  Regulation  B,  Series 
of  1917,  IV.) 


IS 


Transactions  in  Bills  of  Exchange 
and  Trade  Acceptances 

DEFINITIONS 

Regulations  of  Federal  Reserve  Board 

A  bill  of  exchange,  within  the  meaning  of  this  Bill  of  exchange, 
regulation,  is  defined  as  an  unconditional  order  in 
writing,  addressed  by  one  person  to  another,  other 
than  a  banker  .  .  .  signed  by  the  person  giving  it,  . 
requiring  the  person  to  whom  it  is  addressed  to  pay, 
in  the  United  States,  at  a  fixed  or  determinable 
future  time,  a  sum  certain  in  dollars  to  the  order  of 
a  specified  person;  and 

A  trade  acceptance  is  defined  as  a  bill  of  ex-  Trade  acceptance, 
change  drawn  by  the  seller  on  the  purchaser  of 
goods  sold,  and  accepted  by  such  purchaser. 

(Regulations    of    Federal    Reserve    Board,    Regulation    B, 
Series  of  1917,  III.) 

ELIGIRLE  BILLS  AND  TRADE 
ACCEPTANCES 

Statutory  Provisions 

Any  Federal  reserve  bank  may  .    .    .   purchase  Eligible  bills, 
and  sell  in  the  open  market  .   .   .  bills  of  exchange 
of  the  kinds  and  maturities  by  this  Act  made  eligible 
for  rediscount. 

(Federal  Reserve  Act,  Section  14.) 

Regulations  of  Federal  Reserve  Roard 

A  bill  of  exchange  or  acceptance  to  be  eligible  General  conditions 
for  purchase  by  Federal  reserve  banks  under  sec-  °  e  lgl  ' Ity* 
tion  14: 


24 


Specific   conditions. 


Commercial 
character. 


Maturity. 


Commercial    Banking    Practice 

(1)  Must  have  been  accepted  by  the  drawee 
prior  to  purchase  by  a  Federal  reserve  bank  unless 
it  is  accompanied  and  secured  by  shipping  docu- 
ments or  by  a  warehouse,  terminal,  or  other  similar 
receipt  conveying  security  title; 

(2)  May  be  secured  by  the  pledge  of  goods* 
or  collateral,  provided  it  is  otherwise  eligible. 

In  addition  to  the  above  general  requirements, 
each  bill  of  exchange  and  trade  acceptance  pur- 
chased under  the  terms  of  this  regulation  must  also 
conform  to  the  more  specific  requirements  set  forth 
under  Regulation  B,  III  (below) . 

(Regulations  of  Federal  Reserve  Board,  Regulation  B, 
Series  of  1917,  II.) 

To  be  eligible  for  purchase,  the  bill  must  have 
arisen  out  of  an  actual  commercial  transaction, 
domestic  or  foreign;  that  is,  it  must  be  a  bill  which 
has  been  issued  or  drawn  for  agricultural,  industrial, 
or  commercial  purposes  or  the  proceeds  of  which 
have  been  used  or  are  to  be  used  for  the  purpose  of 
producing,  purchasing,  carrying,  or  marketing 
goods  in  one  or  more  of  the  steps  of  the  process  of 
production,  manufacture,  or  distribution.  It  must 
have  a  maturity  at  time  of  purchase  of  not  more 
than  ninety  days,  exclusive  of  days  of  grace. 

(Regulations  of  Federal  Reserve  Board,  Regulation  B, 
Series  of  1917,  III.) 


Opinions  and  Rulings 

See  "Rediscount  of  Drafts  and  Trade  Accept- 
ances," pages  79-83,  above. 


*  When  used  in  this  regulation  the  word  ''goods"  shall  be 
construed  to  include  goods,  wares,  merchandise,  or  agricultural 
products,  including  live  stock. 


Open     Market     Transactions  125 

INELIGIBLE  BILLS  AND  TRADE 
ACCEPTANCES 

Regulations  of  Federal  Reserve  Board 

A  bill  of  exchange  or  acceptance,  to  be  eligible  Finance  paper, 
for  purchase  by  Federal  reserve  banks  under  sec- 
tion 14,  must  not  have  been  issued  for  carrying  or 
trading  in  stocks,  bonds,  or  other  investment  secur- 
ities, except  bonds  and  notes  of  the  Government  of 
the  United  States ;  and  must  not  be  a  bill  the  pro- 
ceeds of  which  have  been  used  or  are  to  be  used  for 
permanent  or  fixed  investments  of  any  kind,  such 
as  land,  buildings,  or  machinery,  or  for  investments 
of  a  merely  speculative  character. 

(Regulations    of    Federal    Reserve  Board,    Regulation    B, 
Series  of  1917,  II.) 

Opinions  and  Rulings 

An  instrument  in  the  form  of  a  bill  of  exchange,  Draft  drawn 
drawn  by  an  agent  of  a  corporation  upon  the  cor-  £°  agent™*10" 
poration  itself,  is  not  a  bill  of  exchange  such  as  is 
eligible  for  purchase  in  the  open  market  by  Federal 
reserve  banks. 

(Opinion  of  Counsel,  Page  462,  September,  1916,  Bulletin.) 

The  fact  that  a  land  company  has  stamped  a  bill  ^"J  J™e^ 
a  trade  acceptance  and  has  signed  such  statement  as  no  value, 
"acceptor"  does  not  in  itself  make  it  a  trade  accept- 
ance. The  bill  was  accepted  by  the  bank  and  not 
by  the  land  company  and  is  therefore  not  eligible 
for  purchase  under  the  regulations  which  require  a 
bill  to  be  accepted  by  the  drawee. 

(Informal  Ruling,  Page  112,  March,  1916,  Bulletin.) 

For  additional  rulings,  see,  under  "Rediscount  of  Drafts  and 
Trade  Acceptances,"  pages  83-84,  above. 


Commercial    Banking    Practice 

EVIDENCE   OF  ELIGIBILITY  AND    RE- 
QUIREMENT OF  STATEMENTS 

Regulations  of  Federal  Reserve  Board 

A  Federal  reserve  bank  shall  take  such  steps  as 
it  deems  necessary  to  satisfy  itself  as  to  the  eligibil- 
ity of  the  bill  offered  for  purchase,  unless  it  presents 
prima  facie  evidence  thereof  or  bears  a  stamp  or 
certificate  affixed  by  the  acceptor  or  drawer  show- 
ing that  it  is  a  trade  acceptance. 

Unless  indorsed  by  a  member  bank,  a  bill  is  not 
eligible  for  purchase  until  a  satisfactory  statement 
has  been  furnished  of  the  financial  condition  of  one 
or  more  of  the  parties  thereto. 

(Regulations  of  Federal  Reserve  Board,  Regulation  B, 
Series  of  1917,  III.) 

Opinions  and  Rulings 

The  fact  that  a  land  company  has  stamped  a  bill 
a  trade  acceptance  and  has  signed  such  statement 
as  "acceptor"  does  not  in  itself  make  it  a  trade  ac- 
ceptance. 

(Informal  Ruling,  Page  112,  March,  1916,  Bulletin.) 


MATURITY 


Statutory  Provisions 


Any  Federal  reserve  bank  may  .  .  .  purchase 
and  sell  .  .  .  bills  of  exchange  of  the  .  .  .  maturi- 
ties by  this  Act  made  eligible  for  rediscount. 

(Federal  Reserve  Act,   Section   14.) 


Open     Market     Transactions  127 

Regulations  of  Federal  Reserve  Board 

To  be  eligible  for  purchase,  the  bill  must  have 
...  a  maturity  at  time  of  purchase  of  not  more 
than  90  days,  exclusive  of  days  of  grace. 

(Regulations  of  Federal  Reserve  Board,  Regulation  B, 
Series  of  1917,  III.) 

For  additional  rulings  see,  under  "Rediscount  of  Drafts  and 
Trade  Acceptances,"  pages  85-86,  above. 


INDEX 

PAGES 

Acceptance  agreements,  duration  of 13-15,  21-22,  36 

Acceptance,  bank,  defined 9,  99,  118 

Acceptance  corporation,  rediscount  of  acceptances  of 103 

Acceptance  credits,  syndicate 14-15 

Acceptance  defined 9 

Acceptance  house,  rediscount  of  paper  of 103 

Acceptance  policy  of  Federal  Reserve  Board: 

General  statement 13-14 

Relative  to  syndicate  acceptance  credits 14-15 

Acceptance,  trade,  defined 9,  78-79,  123 

Acceptances,  bank: 

Based  on  domestic  shipments  of  goods 33-37 

Actual  security,  what  constitutes 24 

Actual  transaction  must  be  involved 34 

Amount  bank  may  accept 23-25,  36-37 

Bill  of  lading  does  not  necessarily  render  draft  eligible 34 

Character,  statutory  provisions  governing 33 

Duration  of  letters  of  credit 36 

Eligibility  not  dependent  on  security  alone 34 

Maturity 34,  35-36 

Purchase  of  bank's  own  acceptance 37 

Release  of  shipping  documents 34-35 

Sale  of  goods  not  required  to  be  involved 34 

Shipment  from  principal  to  agent 34 

Shipping  documents  in  possession  of  bank's  agent 33 

Shipping  documents  must  convey  title 33 

U.  S.  Revised  Statutes,  section  5202,  limitations  of,  not  applicable  to 

bank  acceptances 37 

Based  on  imports  and  exports 16-28 

Acceptance  at  instance  of  exporter 18 

Acceptance  prior  to  purchase  or  sale 19-20 

Acceptances  in  addition  to  loans 25 

Actual  security,  what  constitutes 24 

Amount  bank  may  accept 23-28 

Bullion  as  goods 21 

Coin  as  goods 21 

Delay  in  shipment  immaterial 19 

Drafts  accepted  at  instance  of  exporter 18 

Drafts  against  collateral  of  acceptances 20 

Drafts  drawn  under  contracts  independent  of  export  transaction 17 

Duration  of  acceptance  credits 21-22 

Exemption  from  ten  per  cent  limit 23-24 

Export  contract  not  fulfilled 19 

Foreign  correspondents,  acceptances  by,  under  guarantee 27 

Future  importations  of  goods 19 

General  summary  of  limitations  upon 28 

Good  faith  a  test  in  determining  character 16 

Goods  defined 21 

Guarantee,  acceptances  by  foreign  correspondents  under 27 

Identification  of  specific  goods  not  required 16 

Limitation  on  bank's  liabilities,  not  applicable  to  acceptances 27 

Limitation  on  loans  to  one  borrower 24-25 

See  also  U.  S.  Revised  Statutes,  section  5200 

Loans  up  to  ten  per  cent  limit,  acceptances  in  addition  to 25 

Maturity 21-22 


PAGES 


Acceptances,  bank— continued  . 

Based  on  imports  and  exports— continued 

Option  in  method  of  securing  acceptances * 

Permission  to  accept  not  required. •  •  •  •  •  ■  •  ■  • 

Permission  to  accept  to  amount  of  capital  and  surplus,  application  for        26 

Proof  of  assurances  as  to  character 

Purchase  of  bank's  own  acceptances .  .  .  •  • 

Purchase  of  goods  subsequent  to  acceptance  ot  dratt £» 

Renewal  of  acceptances • 18 

Sales  to  allied  purchasing  commission. 

Secured  bills  exempt  from  ten  per  cent  limit *jj 

Statutory  provisions  governing ■ 

Transaction  must  itself  involve  import  or  export •  •  •  •  •   " 

Transactions  independent  of  import  or  export  transaction,  not  sut-         ^ 

ficient  basis p ^ 

Trust  receipts  as  actual  security • 

Ultimate  export  of  goods,  not  sufficient  basis 

U  S.  Revised  Statutes,  section  5200,  limitations  of **  ™ 

U.  S.  Revised  Statutes,  section  5202,  limitations  of *^ 

Executed  to  furnish  dollar  exchange 31-32 

Amount  bank  may  accept. 32 

Limitation  on  bank's  liabilities 

Maturity,  statutory  provisions  governing 

Permission  to  accept,  application  for n-12 

General  statutory  provisions /  •   ;' '  i 43-46 

Investment  in  acceptances  by  member  banks 

Acceptances  as  commercial  or  business  paper ** 

Actually  existing  value,  bills  drawn  against *3  * 

Bills  discounted  after  removal  of  documents 

Bills  discounted  before  or  after  acceptance *° 

Bills  of  exchange  include  bank  acceptances.    

Bills  secured  by  shipping  documents  or  goods * 

Purchase  or  discount  of  acceptances 46 

Reissuance  of  purchased  acceptance •  ■    . -,fi 

U.  S.  Revised  Statutes,  section  5200 *5>  ^ _*° 

Secured  by  warehouse  receipts oVoV  w-<*7  42 

Amount  bank  may  accept 23~25'  6b  6i>  ^ 

Bill  of  sale  not  eligible  security 39 

Control  of  warehouse  by  acceptor 4Q 

Custodian  of  wool,  receipts  issued  by SS-U 

Eligible  security '   41_42 

Ineligible  security 35-36,  42 

Maturity m 35'  42 

Release  of  warehouse  receipts '  42 

Security  not  specified • 42 

Substitution  of  warehouse  receipts 40 

Sugar  in  bond,  acceptances  against 

Warehouse  receipts:  SR-39 

Issued  by  independent  warehouses M  3g 

Issued  by  lessee 11-12 

Statutory  provisions "    1^_15 

Syndicate  acceptance  credits _  •  •  •  • 

See  also  Acceptance  policy  of  Federal  Reserve  Board 

Use  of  bank  acceptances 38-42 

Warehouse  receipts,  acceptances  secured  by 

See  also  Acceptances,  bank,  Secured  by  warehouse  receipts 


PAGES 

Acceptances,  trade: 

Definition  of 9,  78-79,   123 

Must  be  accepted  by  drawee 78 

Open  market  transactions  in 123-127 

See  also  Open  market  transactions,  Bills  of  exchange  and  trade  accept- 
ances 

Place  of  payment  of  trade  acceptance 78 

Rediscount  of 76-89 

See  also  Rediscount  of.  Drafts  and  trade  acceptances 

Actually  existing  value,  what  constitutes 44-45,  87-89 

Advances  by  Federal  reserve  banks  on  promissory  notes  of  member  banks.  .109-111 

( bilateral 109-110 

County  warrants  not  eligible  collateral 110 

Farm  loan  bonds  not  eligible  collateral 110 

Indorsement  of  collateral 110 

Maturity ? HI 

Renewals  of  member  banks'  notes Ill 

General  statutory  provisions 109 

Security  for  advances 109-110 

Sunday  or  legal  holiday,  notes  due  on Ill 

Advertising  space,  trade  acceptances  based  on 82 

Agricultural  paper,  rediscount  of 90-95 

See  also  Rediscount  of,  Agricultural  paper 
Assignment  of  open  accounts,  ineligible  for  rediscount 58 

Bank  acceptance  defined 9,  99,  118 

Bank  acceptances,  see  Acceptances,  bank 

Bill  of  exchange,  definition  of 76-78,  123 

Bill  of  lading,  draft  secured  by 34 

Bill  of  sale,  not  eligible  as  security  for  bank  acceptance 41,  120 

Bills  of  exchange: 

Drawn  against  actually  existing  value 87-89 

Include  bank  acceptances 44 

Open  market  transactions  in 123-127 

See  also  Open  market  transactions,  Bills  of  exchange  and  trade  accept- 
ances 

Payable  elsewhere  than  in  the  United  States,  rediscount  of 104 

Presentment  for  acceptance 76 

Rediscount  of 76-89 

See  also  Rediscount  of,  Drafts  and  trade  acceptances 

Broker's  paper,  discount  of 63 

Cattle  paper,  see  Chattel  mortgages 

Chattel  mortgages,  as  security  for  agricultural  paper 92 

Chattel  mortgages,  bank  acceptances  against 41, 104 

Collateral  notes: 

Eligibility  for  rediscount 57,  59-60,  63-64 

Not  eligible  security  for  bank  acceptances 41 

See  also  Advances  by  Federal  reserve  banks,  Collateral 

Collateral  trust  notes,  ineligible  for  rediscount 64 

Collection  charges,  bills  payable  with 64 

Commercial  or  business  paper,  bank  acceptances  as 44-45 

Commodity  paper : 

Definition 96-97 

Eligibility  for  open  market  purchase 116,  117 

See  also  Rediscount  of,  Commodity  paper 
Cotton  mill  paper,  rediscount  of 66 


PAGES 

County  warrants  not  eligible  as  collateral  for  advances 110 

Demand  notes  and  drafts  ineligible  for  rediscount 67 

Demand,  notice,  and  protest,  waiver  of 73,  70-77 

Discount  of  acceptances 24-25,  44-46 

See  also  Acceptances,  bank,  Investment  in 

Documents,  shipping 33-35,  44 

Dollar  exchange 29-32 

See  also  Acceptances,  bank,  Executed  to  furnish  dollar  exchange 
Domestic  shipments,  bank  acceptances  based  on 33-37 

See  also  Acceptances,  bank,  Based  on  domestic  shipments 

Drafts  accepted  by  foreign  correspondents  under  guaranty 23 

Drafts  against  collateral  of  acceptances 20 

Drafts  and  bills  of  exchange 76-89,  123-127 

See  also  Open  market  transactions,  Bills  of  exchange,  and  Rediscount 
of,  Drafts  and  trade  acceptances 

Drafts  secured  by  bill  of  lading , 34 

Drafts  to  finance  capital  requirements 84 

Drawee 78 

Export  contract,  acceptances  against 19 

Finance  companies,  rediscount  of  paper  of 63 

Food  products,  rediscount  of  paper  secured  by 60 

Foreign  transactions  as  basis  for  trade  acceptances 79,  82,  83 

Goods  defined 21,  80,  103,  119,  124 

Holidays,  legal,  notes  due  on HI 

Imports  and  exports,  bank  acceptances  based  on 16-28 

See  also  Acceptances,  bank,  Based  on  imports  and  exports 

Indorsement 73,  74,  102,  106,  110 

Investment  in  bank  acceptances  by  member  banks 43-46 

See  also  Acceptances,  bank,  Investment  in 

Letters  of  credit,  duration  of •  • 21-22,  36 

Liberty  bonds,  loans  on,  may  be  exempted  from  ten  per  cent  limit 43 

Limitation  on  bank's  liabilities: 

Not  applicable  to  acceptances 27,  32,  37 

Not  applicable  to  rediscounts  with  reserve  banks 72-73 

See  also  U.  S.  Revised  Statutes,  section  5202 
Limitation  on  loans  to  one  borrower 43 

See  also  U.  S.  Revised  Statutes,  section  5200 

Limitation  on  rediscount  of  paper  of  one  maker  or  indorser 68-72,  87-89 

Live  stock  defined 00 

Loans  to  individuals,  Federal  reserve  banks  do  not  make 57 

Loans  to  ten  per  cent  limit,  bank  acceptances  in  addition  to 25 

Maturity,  see  under  appropriate  class  of  paper 
Mortgages,  see  Chattel  mortgages  and  Collateral  notes 

Non-member  banks,  rediscount  for 61,  73-75 

Notes  of  member  banks,  advances  by  Federal  reserve  banks  on 109-111 

See  also  Advances  by  Federal  reserve  banks 

Notes,  promissory,  not  eligible  for  purchase  in  open  market 116-117 

Notes,  promissory,  rediscount  of 56-75 

See  also  Rediscount  of,  Notes,  promissory 

Open  accounts 68,  81 


PAGES 

OpenniarkettTansactiOTS^ 

-r       Bankaccep'tances, Transactions  in 118-122 

Based  on  domestic  shipments 119 

Based  on  imports  and  exports 118 

Drawn  to  furnish  dollar  exchange 119 

Eligible  bank  acceptances 118-120 

.  Evidence  of  eligibility  and  requirement  of  statements 121 

^r»    4  Ineligible  bank  acceptances 120 

Maturity 121-122 

Secured  by  goods  sold 119 

Secured  by  warehouse  receipts 119 

Unsecured  acceptances 120 

\  Bills  of  exchange  and  trade  acceptances,  transactions  in 123-127 

Bill  of  exchange  defined 123 

Conditions  of  eligibility 123-124 

Definitions 123 

Eligible  bills  and  trade  acceptances 123-124 

Evidence  of  eligibility  and  requirement  of  statements 126 

Ineligible  bills  and  trade  acceptances 125 

Maturity 126-127 

Commodity  paper,  eligibility  of 117 

Notes,  promissory,  not  eligible  for 116-117 

Place  of  payment  of  trade  acceptance 78 

Presentment  of  bills  for  acceptance 76 

Purchase  of  bank  acceptances  by  member  banks 24,  2.5,  44-46 

See  also  Acceptances,  bank,  Investment  in 
Purchase  of  bank  acceptances  by  reserve  banks 118-122 

See  also  Open  market  transactions,  Bank  acceptances 
Purchase  of  bank's  own  acceptance 24,  25,  45-46 

Rediscount  of: 

Agricultural  paper 90-95 

Amount  redisconntable  by  a  Federal  reserve  bank 94-95 

Cattle  dealers'  notes 90 

Cattle  for  breeding,  grazing,  or  fattening 93 

Cattle  mortgages 92 

Chattel  mortgages 92 

Conditions  of  eligibility 91 

Dairy  cattle,  notes  for 92 

Dealers,  notes  of 90 

Definition  of  agricultural  paper 90-91 

Discount  may  be  by  either  maker  or  indorser 93 

Eligible  agricultural  paper 91-94 

Farm  tractors,  notes  for 93 

Farmers'  notes 93 

Fertilizer,  notes  for 92 

Livestock  paper 90 

Packing  company,  note  of 91 

Statutory  provisions  governing  agricultural  paper 49,  91 

Bank  acceptances 99-106 

Acceptance  corporation,  acceptances  of 103 

Bills  payable  outside  United  States 104 

Chattel  mortgages  not  eligible  security 104 

Definition  of  bank  acceptance 99-100 

Differential  rate  for  member  bank  acceptances 103 

Drafts  not  payable  at  reserve  banks 102 


PAGES 

Rediscount  of — continued 

Bank  acceptances— continued  g9 

Eligible  acceptors ' „„_,„« 

Eligible  bank  acceptances i!u_in« 

Evidence  of  eligibility 102   106 

Indorsement '  -^ 

Ineligible  bank  acceptances 1Q5 

Maturity '  '  qq_i  qo 

Negotiability,  conditions  of 

Payment  at  Federal  reserve  bank J05 

Renewals,  rediscount  of • 1 0„ 

Warehouse  receipts  of  independent  warehouses ^™ 

Commodity  paper g7 

Conditions  of  eligibility 96-97 

Defined ',''•'  j Q8 

Direct  discount  for  firms  not  authorized »° 

Eligible  commodity  paper 9g 

Special  rate,  suspension  of 96 

Staples  defined '   7g_gg 

Drafts  and  trade  acceptances 7g 

Acceptance  by  drawee , «7_8Q 

Actually  existing  value,  what  constitutes °'   °» 

Advertising  space,  acceptances  based  on & 

Amount  rediscountable  for  one  bank 76-79 

Definitions gg 

Demand  drafts  ineligible 7Q-83 

Eligible  drafts  and  trade  acceptances ^_°5 

Evidence  of  eligibility 76  g6 

Extension  of  time • 79'  83 

Foreign  shipments,  acceptances  based  on » 

Future  purchases,  acceptances  based  on ^  g9 

Indorsement  of  member  banks cq'_«4 

Ineligible  drafts  and  trade  acceptances °^_°6 

Maturity '   77.70 

Negotiability  of  drafts  and  trade  acceptances. "    '° 

Open  accounts,  acceptances  used  in  liquidation  ot gg 

Qualified  acceptances 73-75  89 

Rediscount  for  non-member  banks.  ••••••••• 80 

Retail  transactions,  trade  acceptances  based  on 

Stamp  "trade  acceptance"  has  no  value 5g_75 

Notes,  promissory '          56 

Agricultural  paper •  ■    •  •  ■  ■ fi«_73 

Amount  rediscountable  for  one  member  bank ^J™  £ 

Collateral  notes 56*  57 

Commercial  paper '  ^g 

Commodity  paper 56 

Definition g7 

Demand  Jnotes  ineligible 56-61 

Eligible  classes  of  notes «*_«« 

Evidence  of  eligibility  and  requirement  of  statements oo  do 

Farmers'  notes 62 

Fixed  investments,  notes  for,  not  eligible ^ 

Indorsement  of  member  banks 62-64 

Ineligible  classes  of  notes ■ 

Liberty  bonds,  notes  to  replace  funds  for  purchase  of ^w 

Maturity 


Rediscount  of — continued  pages 

Notes,  promissory — continued 
Non-member  banks:  ji 

Paper  acquired  from  or  indorsed  by 61,  74 

Rediscount  for 73-75 

Note  of  acceptance  house  or  broker 63 

Notes  based  on  production  and  distribution  of  goods 58 

Open  accounts,  assignment  of 58 

Rediscounted  paper  not  limited  by  U.  S.  Revised  Statutes,  section  5202        72 

Renewalnotes 58,  62 

Secured  notes 59-61 

State  member  banks,  rediscounts  by 69,  72 

Statements,  requirement  and  interpretation  of 65-66 

U.  S.  obligations,  notes  based  on  or  secured  by 56-57,  60-61 

War  Finance  Corporation  bonds,  notes  secured  by 57,  60-61 

Trade  acceptances,  see  Drafts  and  Trade  acceptances 

Rediscounts  with  Federal  reserve  banks 49/~10.6 

General  regulations  governing 53-55 

General  statutory  provisions 49-52 

Reissuance  of  acceptances . 46 

Release  of  shipping  documents  and  warehouse  receipts 35 

Renewal  of  bank  acceptances 22 

Renewal  of  member  banks'  notes  for  advances Ill 

Retail  transactions  as  basis  for  trade  acceptances 80 

Security,  actual,  what  constitutes 24 

Security  eligible  for  acceptances 38-41 

Single  name  paper  ineligible  for  purchase  in  open  market 116-117 

Staples  defined 96 

State  member  banks,  rediscounts  for _ 69,  72 

Statements,  requirement  of 05-66,  121,  126 

Substitution  of  warehouse  receipts 42 

Sunday  or  legal  holiday,  notes  due  on Ill 

Syndicate  acceptance  credits 14-15 

See  also  Acceptances,  bank,  Syndicate  acceptance  credits 

Trade  acceptances 76-89,  123-127 

See  also  Acceptances,  trade 

Transactions,  acceptances  must  be  based  on  actual 34 

Trust  receipts  as  actual  security 24 

U.  S.  Government,  sales  to,  not  basis  for  commodity  paper 97 

U.  S.  obligations  eligible  collateral  for  member  banks'  notes 109-110 

U.  S.  obligations,  rediscount  of  paper  secured  by 50,  60-61 

U.  S.  Revised  Statutes,  section  5200  (ten  per  cent  limit  on  loans) 2  fc-25,  13-46,  71 

U.  S.  Revised  Statutes,  section  5202  (limit  on  liabilities  of  bank) 27,  32,  37,  72-73 

Use  of  bank  acceptances 9 

Warehouse  receipts: 

Bank  acceptances  secured  by 38-42 

See  also  Acceptances,  bank,  Secured  by  warehouse  receipts 

Release  of 35 

Substitution  of 42 

War  Finance  Corporation  bonds: 

Advances  on  member  banks'  notes  secured  by 109 

Rediscount  of  paper  secured  by 57,  60-61,  80 

War  savings  stamps,  paper  secured  by,  ineligible  for  rediscount 63 


National  Bank  of  Commerce 
in  New  York 

ORGANIZED   1839 


President 
James  S.  Alexander 
Vice-Presidents 
R.  G.  Hutchins,  Jr.  John  E.  Rovensky 

Herbert  P.  Howell  Faris  R.  Russell 

J.  Howard  Ardrey  Guy  Emerson 

Stevenson  E.  Ward  Louis  A.  Keidel 

Cashier 
Richard  W.  Saunders 
Assistant  Cashiers 
A.  J.  Oxenham  Everett  E.  Risley 

William  M.  St.  John  H.  P.  Barrand 

A.  F.  Maxwell  H.  W.  Schrader 

John  J.  Keenan  R.  E.  Stack 

Gaston  L.  Ghegan  L.  P.  Christenson 

A.  F.  Brodenck  E.  A.  Schroeder 

R.  H.  Passmore 

Statement  of  Condition 

November  1,   1918 


RESOURCES 

Loans  and   Discounts $307,609,266.34 

Overdrafts,  secured  and  unsecured          -  34,717.82 

U.  S.  Certificates  of  Indebtedness  and  Liberty  Bonds    -  96,560,090.37 

Other  Bonds  and  Securities      ------  10,034,212.13 

Stock  of  Federal   Reserve   Bank      -----  1,200,000.00 

U.  S.  and  Other  Bonds  Borrowed 24,689,450.00 

Bonds  Loaned     -     -------  50,000.00 

Banking  House           -           -------  2,000,000.00 

Due  from  Banks    and   Bankers          -----  5,041,141.05 

Checks  and  other  cash  items    -                    -          -         -          _  3,262,846.30 

Exchanges  for   Clearing   House        -----  49,315,517.36 

Cash  in  Vault  and  Net  Amount  Due  from  Fed.  Res.  Bank  46,487,833.87 

Interest  Accrued        -           ------           -  1,464,253.05 

Customers^  Obligations  a/c  Bank's  Contingent  Liability  1,440,000.00 
Customers'  Liability  under  Letters  of  Credit  and  Acceptances    42,210,499.09 

$59U99,827.38 

LIABILITIES 

Capital  Stock  paid   In           -------  $25,000,000.00 

Surplus    Fund ---  15,000,000.00 

Undivided  Profits,  less  expenses  and  taxes  paid     -         -  9,376,660.45 

Reserved  for  Taxes,  etc.     -------  3,096,833-25 

Dividends    unpaid     -            -------  17,525.00 

Letters  of  Credit 10,098,242.26 

Acceptances  executed  for  Customers        -         -         -          _  32,591,498.60 

Deposits 379,835,997.64 

U.  S.  and  Other   Bonds  Borrowed 24,689,450.00 

Unearned   Discount              -------  1,726,110.99 

Bills  Payable  with  the  Federal  Reserve  Bank        -         -  88,000,000.00 

Liabilities  other  than  those  above  stated         -  1,967,509.19 

^59139,827^8 


OJV 


Tfrs 


387333 


+>     ,*    L 


UNIVERSITY  OF  CALIFORNIA  LIBRARY 


